Item 1. Description of Business 

 

PRODUCT LIABILITY

 

Due to nature of our business, we may face claims for product liability resulting from the use or operation of our lift trucks or other products.

Presently, we maintain product liability insurance in the amount of $1 million. We anticipate increasing this amount $10 million in the future, as we deem necessary to do so. We obtained our insurance commensurate with the initial shipment of our Omni-Directional Lift Trucks.

 

EMPLOYEES

 

As of April 11, 2008, we had one person acting as our Chief Executive Officer and one consultant responsible for helping us obtain financing.  In March 2008, we suspended the employment of all 13 of our employees due to lack of financial resources to continue operations. There can be no assurances that we will be successful in securing financing needed to allow us to continue our future operations or retain any of the previous employees.

 

Item 2.  Description of Property

 

Item 3.                                Legal Proceedings

 

We are not currently a party to any legal proceedings. There has been no bankruptcy, receivership or similar proceedings.

Item 4.                                Submission of Matters to a Vote of Security Holders.

 

 

 

 

 

10

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PART II

 

Item 5. Market for Common Equity and Related Stockholder Matters.

  

		$High			$Low
2008 First Quarter			0.57		0.02
2007 First Quarter			0.97		0.48
Second Quarter			0.60		0.45
Third Quarter			0.56		0.23
Fourth Quarter			0.31		0.10
2006 First Quarter			2.39		1.08
Second Quarter			2.17		1.15
Third Quarter			2.03		0.92
Fourth Quarter			1.01		0.42

 

Common Stock

Our Amended Articles of Incorporation authorize the issuance of 100,000,000 shares of common stock, no par value per share. Holders of shares of common stock are entitled to one vote for each share on all matters to be voted on by the stockholders. Holders of common stock have cumulative voting rights. Holders of shares of common stock are entitled to share ratably in dividends, if any, as may be declared, from time to time by the Board of Directors in its discretion, from funds legally available therefore. In the event of a liquidation, dissolution, or winding up of our company, the holders of shares of common stock are entitled to share pro rata all assets remaining after payment in full of all liabilities. Holders of common stock have no preemptive or other subscription rights, and there are no conversion rights or redemption or sinking fund provisions with respect to such shares.

 

As of April 11, 2008, there were 32,800,093 shares of common stock outstanding.

 

As of April 11, 2008, there were approximately 794 stockholders of record of our common stock, respectively. This does not reflect those shares held beneficially or those shares held in "street" name.

 

Dividend Policy

We have never declared or paid any cash dividends on our common stock. We do not anticipate paying any cash dividends to stockholders in the foreseeable future. In addition, any future determination to pay cash dividends will be at the discretion of the board of directors and will be dependent upon our financial condition, results of operations, capital requirements, and such other factors as the Board of Directors deem relevant. There are no restrictions in our articles of incorporation or bylaws that restrict us from declaring dividends on our common stock.

 

Preferred Stock

 

As of April 12, 2007, there were 275,000 shares of Preferred stock outstanding. We held a special meeting of our shareholders on March 28, 2005 pursuant to which a majority of our shareholders approved an amendment to our certificate of incorporation to increase our authorized preferred stock from 500,000 to 5,000,000 shares. Accordingly, we are authorized to issue up to 5,000,000 shares of preferred stock. In addition, pursuant to said meeting, a majority of our shareholders approved an amendment to our certificate of incorporation to provide that the shares of preferred stock may be issued in series, and shall have such voting powers, full or limited, or no voting powers, and such designations, preferences and relative participating, optional or other special rights, and qualifications, limitations or restrictions thereof, as shall be stated and expressed in the resolution or resolutions providing for the issuance of such stock adopted from time to time by the board of directors. Accordingly, our board of directors is expressly vested with the authority to determine and fix in the resolution or resolutions providing for the issuances of preferred stock the voting powers, designations, preferences and rights, and the qualifications, limitations or restrictions thereof, of each such series to the full extent now or hereafter permitted by the laws of the State of New Jersey.

 

 

11

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The holders of the preferred stock are entitled to receive, when, as, and if declared by our board of directors, out of funds legally available therefore, cash dividends on each share of preferred stock at the rate of 5% per annum, or if cash is not legally available, in additional shares of common stock. The preferred stock, in respect of dividends and distributions upon our liquidation, winding-up, and dissolution, shall rank senior to all classes of our common stock and each other class of capital stock or series of preferred stock created that does not expressly provide that it ranks senior to, or on a parity with, the preferred stock. The holders of preferred stock are entitled to cast 10 votes for each share held of the preferred Stock on all matters presented to our shareholders for shareholder vote.

 

Warrants

 

We have issued warrants both as part of “stock units”, and as an integral part of convertible note issues. The value of the warrants and conversion options which are classified as liabilities are revalued each reporting period. These values are determined by a Black-Scholes Model. Most of these issuances contain Registration Payment Arrangements (RPAs), which impose liquidated damages under certain circumstances. EITF 00-19-2 specifies the accounting treatment for derivatives that contain RPA’s and provides guidance on accounting for potential obligations of the RPA’s. The accounting treatment of derivatives will not change as a result of EITF 00-19-2 as the “RPAs” were not the sole determining factor in prior decisions about derivative classification. Each of these warrants is exercisable over five year periods from dates of issuance at prices ranging from $0.45-$1.75 per share. See Note 4 - Capitalization for additional information.

Recent Accounting Pronouncement

The Financial Accounting Standards Board (FASB) has recently issued FASB Staff Position EITF 00-19-2 which modifies the accounting treatment of derivatives that flow from financings involving embedded derivatives. This Staff Position is effective for financial statements for periods beginning January 1, 2007. Management believes that this will cause some change in the way we account for derivatives. Management is evaluating this position and has not made a determination as to the effective it will have on our financial statements.

 

The Company has reviewed other accounting pronouncements issued during 2007 and 2006, and has concluded that they will have no effect on our financials statements.

RISK FACTORS

In addition to other information contained in this Form 10-KSB, the following Risk Factors should be considered when evaluating the forward-looking statements contained in this Form 10-KSB:

 

RISKS RELATED TO OUR FINANCIAL CONDITION AND BUSINESS

 

WE MAY NEVER BECOME PROFITABLE AND CONTINUE AS A GOING CONCERN BECAUSE WE HAVE HAD LOSSES SINCE OUR INCEPTION.

 

We may never become profitable because we have incurred losses and experienced negative operating cash flow since our formation. For our fiscal years ended December 31, 2007 and 2006, we had a net loss attributable to common stockholders of approximately $3.2 and $ 6.2 million, respectively. We expect to continue to incur significant expenses. Our operating expenses have been and are expected to continue to outpace revenues and result in significant losses in the near term. We currently have no cash on hand. We may never be able to reduce these losses, which will require us to seek additional debt or equity financing. We do not currently have commitments for additional funds and there can be no assurance that additional financing will be available, or if available, will be on acceptable terms. If we are unable to obtain sufficient funds during the next couple of months we will have to seek bankruptcy protection, which would have a material adverse impact on our business prospects.

 

 

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OUR BUSINESS OPERATIONS WILL BE HARMED IF WE ARE UNABLE TO OBTAIN ADDITIONAL FUNDING.

 

Our business operations will be harmed if we are unable to obtain additional funding. We do not know if additional financing will be available when needed, or if it is available, if it will be available on acceptable terms. Insufficient funds may prevent us from implementing our business strategy or may require us to delay, scale back or eliminate certain opportunities for the provision of our technology and products.

 

THE PRICING POLICY FOR OUR LIFT TRUCKS MAY BE SUBJECT TO CHANGE, AND ACTUAL SALES OR OPERATING MARGINS MAY BE LESS THAN PROJECTED.

 

We are assessing present and projected component pricing in order to establish a pricing policy for the SIDEWINDER Lift Truck. We have not finalized our assessment as current prices for certain lift truck components reflect special development charges, which are expected to be reduced as order volume for such components increase and as manufacturing efficiencies improve. We intend to price our lift trucks so as to maximize sales yet provide sufficient operating margins. Given the uniqueness of our product, we have not yet established final pricing sensitivity in the market. Consequently, the pricing policy for its lift trucks may be subject to change, and actual sales or operating margins may be less than projected.

 

WE HAVE RECEIVED LIMITED INDICATIONS OF THE COMMERCIAL ACCEPTABILITY OF OUR OMNI-DIRECTIONAL LIFT TRUCK. ACCORDINGLY, WE CANNOT PREDICT WHETHER OUR OMNI-DIRECTIONAL PRODUCTS CAN BE MARKETED AND SOLD IN A COMMERCIAL MANNER.

 

Our success will be dependent upon our ability to sell Omni-Directional products in quantities sufficient to yield profitable results. To date, we have received limited indications of the commercial acceptability of our Omni-Directional lift truck. Accordingly, we cannot predict whether the Omni-Directional product can be marketed and sold in a commercial manner.

 

WE CANNOT ASSURE THAT WE WILL HAVE IN PLACE PATENT PROTECTION AND CONFIDENTIALITY AGREEMENTS FOR OUR PROPRIETARY TECHNOLOGY. IF WE DO NOT ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, THERE IS A RISK THAT THEY WILL BE INFRINGED UPON OR THAT OUR TECHNOLOGY INFRINGES UPON ONE OF OUR COMPETITOR'S PATENTS. AS A RESULT, WE MAY EXPERIENCE A LOSS OF REVENUE AND OUR OPERATIONS MAY BE MATERIALLY HARMED.

 

Our success will be dependent, in part, upon the protection of our proprietary Omni-Directional technology from competitive use. A form of our Omni-Directional technology was originally patented in 1973 and was sold to the US Navy. We secured a transfer of this technology from the Navy in 1996 under the terms of a CRADA agreement (Cooperative Research and Development Agreement) and we have worked since that time to commercialize Omni-Directional products. We received 3 patents regarding the "redesign" of the wheel. In addition, we have a license agreements for the algorithms used to control vehicular movement, and a patent for this technology has been applied for. Further, we have applied for patents for a movable operator's control station and a munitions handler. Notwithstanding the foregoing, we believe our lack of patent protection is a material competitive risk. Our competitors could reverse engineer our technology to build similar products. Also, certain variations to the technology could be made whereby our competitors may use the technology without infringing upon our intellectual property. The patent for the Omni-Directional wheel expired in 1990. We, however, have received patent protection of certain other aspects of its Omni-Directional wheel, and for features specific to our lift truck. In addition to the patent applications, we rely on a combination of trade secrets, nondisclosure agreements and other contractual provisions to protect our intellectual property rights. Nevertheless, these measures may be inadequate to safeguard our underlying technology. If these measures do not protect the intellectual property rights, third parties could use our technology, and our ability to compete in the market would be reduced significantly. In addition, if the sale of our product extends to foreign countries, we may not be able to effectively protect its intellectual property rights in such foreign countries.

 

 

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In the future, we may be required to protect or enforce our patents and patent rights through patent litigation against third parties, such as infringement suits or interference proceedings. These lawsuits could be expensive, take significant time, and could divert management's attention from other business concerns. These actions could put our patents at risk of being invalidated or interpreted narrowly, and any patent applications at risk of not issuing. In defense of any such action, these third parties may assert claims against us. We cannot provide any assurance that we will have sufficient funds to vigorously prosecute any patent litigation, that we will prevail in any of these suits, or that the damages or other remedies awarded, if any, will be commercially valuable. During the course of these suits, there may be public announcements of the results of hearings, motions and other interim proceedings or developments in the litigation. If securities analysts or investors perceive any of these results to be negative, it could cause the price of our common stock to decline.

 

WE CURRENTLY LACK ESTABLISHED DISTRIBUTION CHANNELS FOR OUR LIFT TRUCK PRODUCT LINE.

 

We do not have an established channel of distribution for our lift truck product line. We have initiated efforts to establish a network of designated dealers throughout the United States. Although we have received indications of interest from a number of equipment distributors, to date, such indications have been limited. We cannot predict whether we will be successful in establishing our intended dealer network.

IF WE ARE UNABLE TO RETAIN THE SERVICES OF ROBERT WATSON, OUR CHIEF EXECUTIVE OFFICER, OR IF WE ARE UNABLE TO SUCCESSFULLY RECRUIT, QUALIFIED PERSONNEL, WE MAY NOT BE ABLE TO CONTINUE OPERATIONS.

 

Our ability to successfully conduct our business affairs will be dependent upon the capabilities and business acumen of current management including Robert Watson, our President and Chief Executive Officer. We have entered into an employment agreement with Mr. Watson, however, we do not maintain key man life insurance with respect to Mr. Watson. Accordingly, shareholders must be willing to entrust all aspects of our business affairs to our current management. Further, the loss of any one of our management team could have a material adverse impact on our continued operation.

 

 On April 4, 2008, Robert Watson resigned as Chief Executive Officer, President and a director of Airtrax Inc. effective immediately. Mr. Watson will continue to serve as an advisor to the Company on a part-time consulting basis to continue to pursue financing for the Company.

OUR INDUSTRY AND PRODUCTS ARE CONSIDERED TO BE HIGH-RISK WITH A HIGH INCIDENCE OF SERIES PERSONAL INJURY OR PROPERTY LOSS WHICH COULD HAVE A MATERIAL ADVERSE IMPACT ON OUR BUSINESS.

 

The manufacture, sale and use of Omni-Directional lift trucks and other mobility or material handling equipment is generally considered to be an industry of a high risk with a high incidence of serious personal injury or property loss. In addition, although we intend to provide on-site safety demonstrations, the unique, sideways movement of the lift truck may heighten potential safety risks. Despite the fact that we intend to maintain sufficient liability insurance for the manufacture and use of our products, one or more incidents of personal injury or property loss resulting from the operation of our products could have a material adverse impact on our business.

 

IF WE DO NOT SUCCESSFULLY DISTINGUISH AND COMMERCIALIZE OUR DEVELOPED PROPRIETARY PRODUCTS AND SERVICES, WE WILL NOT ATTRACT A SUFFICIENT NUMBER OF CUSTOMERS. ACCORDINGLY, WE MAY BE UNABLE TO COMPETE SUCCESSFULLY WITH OUR COMPETITORS OR TO GENERATE REVENUE SIGNIFICANT TO SUSTAIN OUR OPERATIONS.

 

Although management believes our product will have significant competitive advantages to conventional lift trucks, we are competing in an industry populated by some of the foremost equipment and vehicle manufacturers in the world. All of these companies have greater financial, engineering and other resources than us. No assurances can be given that any advances or developments made by such companies will not supersede the competitive advantages of our Omni-Directional lift truck. In addition, many of our competitors have long-standing arrangements with equipment distributors and carry one or more of competitive products in addition to lift trucks. These distributors are prospective dealers for our company. It therefore is conceivable that some distributors may be loath to enter into any relationships with us for fear of jeopardizing existing relationships with one or more competitors.

 

 

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RISKS RELATING TO OUR COMMON STOCK

 

WE HAVE ISSUED COMMON STOCK, WARRANTS, AND CONVERTIBLE NOTES TO INVESTORS AND IN EXCHANGE FOR FEES AND SERVICES AT A DISCOUNT TO THE MARKET PRICE OF OUR COMMON STOCK AT THE TIME OF SUCH ISSUANCE. THIS RESULTS IN A LARGE NUMBER OF SHARES WHICH HAVE BEEN ISSUED AND A LARGE NUMBER OF SHARES UNDERLYING OUR WARRANTS AND OTHER CONVERTIBLE SECURITIES THAT ARE OR MAY BE AVAILABLE FOR FUTURE SALE AND THE SALE OF THESE SHARES MAY DEPRESS THE MARKET PRICE OF OUR COMMON STOCK.

 

We had 32,800,093 shares of common stock outstanding as of April 11, 2008, and we had convertible notes which require the issuance of  approximately 9,726,000 additional shares of common stock pursuant to our October 2005 private placements and July 2006 note issuances, in which the conversion price has been adjusted resulting from the February 20, 2007 issuance of $3,734,040 Secured Convertible Promissory Notes, convertible into 8,297,867 additional shares of common stock at $0.45 per common share. Additionally, warrants which require the issuance of 10,494,131 additional shares of common stock pursuant to our November 2004, and February, May, and October 2005 private placements and 2007 note issuances. Further, we issued 16,595,732 warrants in connection with the February 20, 2007 issuance of $3,734,040 Secured Convertible Promissory Notes. Further, we often issue common stock and warrants in exchange for fees and services at a discount to the market price of our common stock at the time of such issuance. This results in a large number of shares, which have been issued, a large number of shares underlying our warrants and other convertible securities that are or may be available for future sale, and may create an overhang of securities for sale. The sale of these shares which were or will be issued upon exercise or conversion of our securities at a discount to the market price of our common stock at the time of issuance may depress the market price of our common stock and is dilutive to shareholder value.

 

OUR COMMON STOCK IS SUBJECT TO THE "PENNY STOCK" RULES OF THE SEC AND THE TRADING MARKET IN OUR SECURITIES IS LIMITED, WHICH MAKES TRANSACTIONS IN OUR STOCK CUMBERSOME AND MAY REDUCE THE VALUE OF AN INVESTMENT IN OUR STOCK.

 

The Securities and Exchange Commission has adopted Rule 15g-9 which establishes the definition of a "penny stock," for the purposes relevant to us, as any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, the rules require:

 

 

25

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o that a broker or dealer approve a person's account for transactions in penny stocks; and

 

o the broker or dealer receive from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased.

 

In order to approve a person's account for transactions in penny stocks, the broker or dealer must:

 

o obtain financial information and investment experience objectives of the person; and

 

o make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.

 

The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the Commission relating to the penny stock market, which, in highlight form:

 

o sets forth the basis on which the broker or dealer made the suitability determination; and

 

o that the broker or dealer received a signed, written agreement from the investor prior to the transaction.

 

Generally, brokers may be less willing to execute transactions in securities subject to the "penny stock" rules. This may make it more difficult for investors to dispose of our common stock and cause a decline in the market value of our stock.

 

 

 

 

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Item 7.  Financial Statements.

Index to Consolidated Financial Statements

	Page
Report of Independent Registered Public Accounting Firm	F-1
Consolidated Balance Sheet as of December 31, 2007	F-2
Consolidated Statements of Operations for the years ended December 31, 2007 and 2006	F-3
Consolidated Statement of Changes in Shareholders' Equity (Deficiency) for the years ended December 31, 2007 and 2006	F-4
Consolidated Statements of Cash Flows for the year ended December 31, 2007 and 2006	F-5
Notes to Consolidated Financial Statements as of December 31, 2007 and 2006	F-6

 

 

 

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders

Airtrax, Inc.

 

We have audited the accompanying balance sheet of Airtrax, Inc. (the "Company") as of December 31, 2007 and 2006 and the related statements of operations, changes in stock holders' deficiency and cash flows for the two years ended December 31, 2007 and 2006. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate under the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, based on our audits, the financial statements referred to above present fairly, in all material respects, the financial position of Airtrax, Inc. as of December 31, 2007 and 2006, and the results of its operations and its cash flows for the years ended December 31, 2007 and 2006 in accordance with U.S. generally accepted accounting principles.

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As shown in the accompanying financial statements, at December 31, 2007, the Company had a working capital deficiency of approximately $2.8 million as well as an accumulated deficit $29.7 million. In addition, the Company has had a continuing record of losses. These factors among other things discussed in the notes to the financial statements, raise substantial doubt about the ability of the Company to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts or classification of liabilities that might be necessary should the Company be unable to continue in operation.

 

/s/ Robert G. Jeffrey, Certified Public Accountants

April 11, 2008

Wayne, New Jersey

 

 

F-1

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Part 1-Financial Information

 

Item 1. Financial Statements

 

 

AIRTRAX, INC.

BALANCE SHEET

December 31, 2007

 

 

ASSETS			2007
Current Assets
Cash		$	304,735
Accounts receivable, net of reserve			32,814
Inventory			1,041,598
Prepaid expenses			40,906
Vendor advances			165,712
Total current assets			1,585,765
Fixed Assets			670,369
Less: accumulated depreciation			(401,849)
Net fixed assets			268,520
Other Assets
Deferred financing costs & other			226,305
Prepaid interest			296,582
Patents – net			136,253
Total other assets			659,140
TOTAL ASSETS		$	2,513,425
LIABILITIES AND STOCKHOLDERS’ DEFICIENCY
Current Liabilities
Accounts payable		$	323,003
Accrued liabilities			1,157,151
Shareholder loans payable			40,713
Current portion-Convertible debt			2,175,723
Warrants and conversion option liability			709,183
Total current liabilities			4,405,773
Long Term Convertible Debt			1,826,667
TOTAL LIABILITIES			6,232,440
Stockholders’ Deficiency
Preferred stock – authorized; 5,000,000 shares, no par value, 275,000 issued and outstanding			12,950
Common stock – authorized, 100,000,000 shares; no par value, issued and outstanding – 26,755,867 and 24,260,352, respectively			23,395,647
Paid in capital – warrants			2,315,935
Paid in capital – options			244,799
Accumulated deficit			(29,688,346)
Total stockholders’ deficiency			(3,719,015)
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIENCY		$	2,513,425

 

 

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

 

 

F-2

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AIRTRAX, INC.

STATEMENT OF OPERATIONS

For the Twelve Months Ended December 31,

(In dollars, except share data)

 

 

		2007				2006
Revenues		$	745,367			$	1,346,913
Cost of sales			749,043				1,470,542
Gross Margin			(3,676	)			(123,629	)
Operating and administrative expenses
General and Administrative costs			2,809,689				3,943,632
Impairment of Filco advances			-				2,000,000
Total Operating Expenses			2,809,689				5,943,632
Operating loss			(2,813,365	)			(6,067,261	)
Other income expense
Interest expense			(386,510	)			(230,149	)
Revaluation income			4,266,042				1,412,143
Amortization of financing costs			(457,696	)			(251,438	)
Amortization of debt discounts			(1,595,007	)			(648,440	)
Liquidated damages			(513,431	)			(214,247	)
Excess cost of liabilities over proceeds			(1,401,941	)			-
Setttlement expenses			-				(290,804	)
Other income			74,285				(2,255	)
Net loss before taxes			(2,827,623	)			(6,292,451	)
Income tax (expense) benefit, State:			(413,284	)			437,803
Net loss before dividends			(3,240,907	)			(5,854,648	)
Deemed dividends on preferred stock			-				303,100
Net loss attributable to common shareholders			(3,240,907	)			(6,157,748	)
Preferred stock dividends paid			-				(112,500	)
Deficit allocable to common shareholders		$	(3,240,907	)		$	(6,270,248	)
Net loss accumulated;
Net loss attributable to common shareholders		$	(3,240,907	)		$	(5,854,648	)
Adjustment for preferred share dividends accumulated			68,750				91,667
Net Loss allocable to common shareholders		$	(3,309,657	)			(5,946,315	)
Net loss per share basic & diluted		$	(0.13	)		$	(0.27	)
Weighted average shares outstanding			24,962,106				23,055,578

 

 

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

 

F-3

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AIRTRAX, INC.

 

STATEMENT OF CHANGES IN EQUITY

 

For the Two Years Ended December 31, 2007 and 2006

 

		Common Shares				Common Stock Amount				Preferred Shares				Preferred Amount				Paid in Capital Warrants				Paid in Capital Options				Accumulated Deficit				Total
Balance at December 31, 2005			21,939,360			$	18,426,605				275,000				12,950			$	2,051,118			$	1,330,948			$	(20,177,194	)		$	1,644,427
Warrants issued in connection
with Convertible debt											-				-				264,817				-				-				264,817
Shares issued for settlement of interest			49,081				66,516				-				-				-				-				-				66,516
Employee stock awards			75,000				115,470				-				-				-				-				-				115,470
Shares issued for services			651,257				859,856				-				-				-				-				-				859,856
Shares issued to directors			145,000				222,500				-				-				-				-				-				222,500
Shares issued in settlement of Note default			184,000				93,490				-				-				-				-				-				93,490
Options issued			-				-				-				-				-				76,351				-				76,351
Conversion of convertible debt			761,952				1,138,012				-				-				-				-				-				1,138,012
Shares issued for cash			35,723				65,500				-				-				-				-				-				65,500
Proceeds from warrant extensions							117,000												-												117,000
Dividends on preferred stock			418,879				415,610				-				-				-				-				(112,500	)			303,110
Net Loss			-				-				-				-				-								(6,157,745	)			(6,157,745	)
Balance at December 31, 2006			24,260,352			$	21,520,559				275,000			$	12,950			$	2,315,935			$	1,407,299			$	(26,447,439	)		$	(1,190,696	)
Shares issued for services			317,261				166,016				-				-				-				-				-				166,016
Correction of shares outstanding			(19,667	)			(24,389	)			-				-				-				-				-				(24,389	)
Shares issued to directors			269,348				166,664				-				-				-				-				-				166,664
Cancellation of options			-				1,162,500				-				-				-				(1,162,500	)			-				-
Conversion of convertible debt			933,407				404,297				-				-				-				-				-				404,297
Shares issued in connection with Feb 2005 MFN			995,166				-				-				-				-				-				-				-
Net Loss			-				-				-				-				-				-				(3,240,907	)			(3,240,907	)
Balance at December 31, 2007			26,755,867			$	23,395,647				275,000			$	12,950			$	2,315,935			$	244,799			$	(29,688,346	)		$	(3,719,015	)

 

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

F-4

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AIRTRAX, INC.

FOR THE TWELVE MONTHS ENDED DECEMBER 31,

 

 

		2007						2006
Cash flows from operating activities:
Net loss		$	(3,240,907	)				$	(6,157,745	)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization			74,528						69,019
Amortization of debt discounts			2,052,693						899,878
Common stock issued as payment for services			333,055						1,274,177
Provision for bad debts			22,403						-
Impairment of advances to Filco GmBH			-						2,000,000
Stock issued in settlement of obligations			-						93,490
Excess discount expense			1,401,941						-
Cost of settling liquidated damages			-						183,572
Provision for excess inventory			64,000						-
Deemed dividend on preferred stock			-						303,100
Amortization of prepaid interest			218,523						-
Revaluation income			(4,266,042	)					(1,412,143	)
Accrued interest on shareholder advances			-						7,136
Stock to settle interest			-						66,464
Adjustment of deferred tax asset			413,284						-
Decrease in accrual of deferred tax benefit			506,605						7,413
Change in assets (liabilties)
(Increase) decrease in accounts receivable			(4,513	)					43,653
(Increase) decrease in vendor advances			(62,084	)					59,889
Increase in prepaid expenses			(40,906	)					-
(Increase) decrease in inventory			(56,141	)					955,682
Increase in accrued expenses			500,220						524,984
(Decrease) increase in accounts payable			(579,529	)					211,898
Net cash used in operating activities			(2,662,870	)					(869,533	)
Cash flows from investing activities:
Acquisition of equipment			(47,232	)					(151,577	)
Additions to patent cost			-						(6,800	)
Net cash used in investing activities			(47,232	)					(158,377	)
Cash flows from financing activities:
Proceeds from converted debt			-						1,219,800
Proceeds from convertible debt			2,822,100						-
Proceeds from the sale of common stock			-						65,500
Payment on note payable			(100,000	)					-
Proceeds from notes payable to related parties			-						35,000
Payment of notes payable to related parties			(35,000	)					(100,941	)
Proceeds from exercise of warrants			-						117,000
Net cash provided by financing activities			2,687,100						1,336,359
Net (decrease) increase in cash			(23,002	)					308,449
Cash, beginning of year			327,737						19,248
Cash, end of year		$	304,735					$	327,697

 

 

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

 

 

 

 

F-5

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AIRTRAX, INC.

NOTES TO FINANCIAL STATEMENTS

December 31, 2007

NOTE 1- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

The accompanying audited financial statements have been prepared on the accrual basis of accounting in conformity to generally accepted accounting principles in the United States.

 

Business

 

The Company was formed April 17, 1997. It has designed a lift truck vehicle using omni-directional technology obtained under a contract with the United States Navy Surface Warfare Center in Panama City, Florida. The right to exploit this technology grew out of a Cooperative Research and Development Agreement with the Navy. Significant resources have been devoted during prior years to the construction of a prototype of this omni-directional forklift vehicle. The Company recognized its first revenues from sales of this product during the year 2005.

 

Development Stage Accounting

 

In prior periods the Company was a development stage company, as defined in Statement of Financial Accounting Standards No. 7 (SFAS 7). The Company became an operational company in 2005.

 

The Company has incurred losses since its inception. Until the end of 2004, these losses were financed by private placements of equity securities. During 2006 and 2007, the Company obtained financing almost exclusively from the issuance of convertible debentures. The Company will need to raise additional capital through the issuance of debt or equity securities to continue to fund operations.

Cash and Cash Equivalents

 

The Company considers cash deposits and short term debt securities that can be redeemed on demand and investments that have original maturities of less than three months to be cash equivalents.

 

Fair Value of Financial Instruments

 

The Company’s financial instruments are cash and cash equivalents, accounts receivable, accounts payable, and notes payable, and the related security issuances.  The recorded values of these financial instruments approximate their fair values based on their short-term nature.  The recorded values of notes payable approximate their fair values, as interest approximates market rates.

 

Concentrations of Credit Risk

 

Financial instruments subject the Company to concentrations of credit risk.  The Company places its cash and temporary cash investments with credit quality institutions.  At times, such investments may be in excess of applicable government mandated insurance limits.  With respect to accounts receivable, the Company limits credit risk by performing ongoing credit evaluations.  Management does not believe significant risk exists in connection with the Company’s concentrations of credit at December 31, 2007.

 

Accounts Receivable

 

The Company provides an allowance for doubtful accounts (when necessary) equal to the estimated uncollectible amounts.  The Company’s estimate is based on historical collection experience and a review of the current status of trade accounts receivable.  It is reasonably possible that the Company’s estimate of the allowance for doubtful accounts will change.  As of December 31, 2007,  there was a reserve of $13,750 and there was no allowance for doubtful accounts as of December 31, 2006..

 

 

F-6

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Inventories

 

Inventory consists principally of component parts and supplies used to assemble lift truck vehicles. Inventories are stated at the lower of cost (determined on a first in-first out basis) or market.

 

Fixed Assets

 

Fixed assets, consisting of office furniture and equipment, demo and shop equipment along with castings and tools, are recorded at cost. The cost of developing and constructing the prototype omni-directional helicopter handling vehicle and the omni-directional lift truck vehicle is expensed as incurred. Expenditures for major additions and improvements are capitalized and minor replacements, maintenance, and repairs are charged to expense as incurred.  When property and equipment are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the results of operations for the respective period.  Depreciation is provided over the estimated useful lives of the related assets ranging from 5 to 7 years using the straight-line method for financial statement purposes.

 

Intangibles

 

The Company incurred costs to acquire certain patent rights. These costs are capitalized and are being amortized over a period of fifteen years on a straight line basis.

 

In accordance with Statement of Financial Accounting Standards  No. 142, “Goodwill and Other Intangible Assets,” the Company reviews intangibles for impairment annually, or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of the Company's business enterprise below its carrying value. The impairment test requires the Company to estimate the fair value of the Company's overall business enterprise down to the reporting unit level. The Company performs its annual impairment test in its fiscal fourth quarter. No impairment charges related to goodwill or other intangibles were recorded in the years ended December 31, 2007 and 2006.

 

The Company continually evaluates whether events and changes in circumstances warrant revised estimates of useful lives or recognition of an impairment loss of our intangibles, which as of December 31, 2007, consist mainly of patents and licensing agreements.  The conditions that would trigger an impairment assessment of our intangible assets include a significant, sustained negative trend in our operating results or cash flows, a decrease in demand for our products, a change in the competitive environment and other industry and economic factors.

 

Deferred Financing Costs

 

Deferred financing costs represent legal, commitment; processing, consulting, and other fees associated with the issuance of the Company’s debt.  Deferred financing costs are being amortized over the term of the related debt.

 

Impairment of Long-Lived Assets  

 

Pursuant to Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-lived Assets”, the Company continually monitors events and changes in circumstances that could indicate carrying amounts of long-lived assets may not be recoverable. An impairment loss is recognized when expected cash flows are less than the asset's carrying value. Accordingly, when indicators of impairment are present, the Company evaluates the carrying value of such assets in relation to the operating performance and future undiscounted cash flows of the underlying assets. The Company’s policy is to record an impairment loss when it is determined that the carrying amount of the asset may not be recoverable. Impairment charges of $2,000,000 were recorded for the year ended December 31, 2006, while there were no impairment charges for the year ended December 31, 2007.

 

 

 

F-7

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Use of Estimates

 

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimated.

 

Revenue Recognition

 

Revenue on product sales is recognized when persuasive evidence of an arrangement exists, such as when a purchase order or contract is received from the customer, the price is fixed, title to the goods has changed and there is a reasonable assurance of collection of the sales proceeds. The Company obtains written purchase authorizations from customers for a specified amount of product at a specified price and considers delivery to have occurred at the time of shipment. Revenue is recognized at shipment, and where the following criteria are met; persuasive evidence of an arrangement exists; delivery has occurred; the sales price is fixed or determinable; and collectability is reasonably assured.

 

Revenue from services is recognized when the service is performed, and where the following criteria are met: persuasive evidence of an arrangement exists; the contract price is fixed or determinable; and collectability is reasonably assured. Revenue from research and development activities relating to firm fixed-price contracts is generally recognized as billing occurs. Revenue from research and development activities relating to cost-plus-fee contracts include costs incurred plus a portion of estimated fees or profits based on the relationship of costs incurred to total estimated costs. Contract costs include all direct material and labor costs and an allocation of allowable indirect costs as defined by each contract, as periodically adjusted to reflect revised agreed upon rates. These rates are subject to audit by the other party. Amounts can be billed on a bi-monthly basis. Billing is based on subjective cost investment factors.

 

Advertising Costs

 

Advertising costs are expensed as incurred.  There were no advertising costs incurred during 2007 and 2006.

 

Accounting for Income Taxes

 

As part of the process of preparing our financial statements, we are required to estimate our income taxes. This process involves estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences may result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income. If there is not persuasive evidence that recovery will occur, we would establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, the value of the benefit of the tax deferral is reduced or eliminated.

 

F-17

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WARRANTS

 

The Company has issued warrants both as part of “stock units” and as an integral part of convertible note issues. The determination to classify the warrants as either derivative liabilities or equity was based upon consideration of the specific criteria for classification established in EITF 00-19.  The fair value of the warrants is determined using a Black-Scholes Model.  Those warrants classified as liabilities are subject to revaluation for each reporting period following the guidance in SFAS 133.

 

In connection with the Tentative Agreement mentioned in Note 7, Mr. Filipov was to receive options to purchase 900,000 shares of the Company’s common stock at an exercise price of $0.01. The Company did not issue such options because the Acquisition Agreement was terminated and the conditions for such issuance were never fulfilled. Mr. Filipov has indicated that he believes that the conditions were fulfilled and that the Company owes him the options. The Company and Mr. Filipov are continuing to discuss a mutually acceptable settlement.

 

NOTE 9- RECENT ACCOUNTING PRONOUNCEMENTS

 

The Financial Accounting Standards Board (FASB) has recently issued “FASB Staff Position EITF 00-19-2 which modifies the accounting treatment of derivatives that flow from financings involving embedded derivatives. This Staff Position is effective for financial statements for periods beginning January 1, 2007. Management believes that this will cause some change in the way the Company accounts for derivatives. Management is evaluating this position and has not made a determination as to the effect it will have on its financial statements.

 

The Company has reviewed other accounting pronouncements issued during 2006 and 2007, and has concluded that they will have no effect on the Company's financials statements.

 

NOTE 10-GOING CONCERN

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As shown in the financial statements, the Company had a material working capital deficiency and accumulated deficit as of December 31, 2007, and has experienced continuing losses. These factors raise substantial doubt about the ability of the Company to continue as a going concern. The financial statements do not include adjustments relating to the recoverability of assets and classification of liabilities that might be necessary should the Company be unable to continue in operation. The Company’s present plans, the realization of which cannot be assured, to overcome these difficulties include but are not limited to the continuing effort to raise capital in the public and private markets.

 

NOTE 11-SUBSEQUENT EVENTS

 

 

INDEBTEDNESS OF EXECUTIVE OFFICERS AND DIRECTORS

 

No executive officer, director or any member of these individuals' immediate families or any corporation or organization with whom any of these individuals is an affiliate is or has been indebted to us since the beginning of our last fiscal year.

FAMILY RELATIONSHIPS

 

There are no family relationships among our executive officers and directors.

 

30

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LEGAL PROCEEDINGS

 

As of the date of this filing, there are no material proceedings to which any of our directors, executive officers, affiliates or stockholders is a party adverse to us.

 

CODE OF ETHICS

 

We have not adopted a Code of Ethics within the meaning of Item 406(b) of Regulation S-B of the Securities Exchange Act of 1934.

Section 16(a) Beneficial Ownership Compliance

Section 16(a) of the Securities Exchange Act of 1934 requires our directors and executive officers and persons who beneficially own more than ten percent of a registered class of our equity securities to file with the SEC initial reports of ownership and reports of change in ownership of common stock and other equity securities of our company. Officers, directors and greater than ten percent stockholders are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file. Based solely upon a review of Forms 3 and 4 and amendments thereto furnished to us under Rule 16a-3(e) during the fiscal year ended December 31, 2007, and Forms 5 and amendments thereto furnished to us with respect to the fiscal year ended December 31, 2007, we believe that during the year ended December 31, 2007, our executive officers, directors and all persons who own more than ten percent of a registered class of our equity securities complied with all Section 16(a) filing requirements.

 

 

Name	Position	Date
/s/ WILLIAM F. HUNGERVILLE William F. Hungerville	Chief Executive Officer (Principal Executive Officer), Chief Financial Officer (Principal Financial and Accounting Officer) and Director	April 15, 2008
Andrew Guzzetti	Director	April 15, 2008
/s/ D. BARNEY HARRIS D. Barney Harris	Director	April 15, 2008
/s/ JAMES HUDSON James Hudson	Director	April 15, 2008
/s/ FIL FILIPOV  Fil Filipov	Director	April 15, 2008
Izak On	Director	April 15, 2008
Robert Borski, Jr.	Director	April 15, 2008

39