Item 1. DESCRIPTION OF BUSINESS.
(a) History and Development of Our Inventions
Torvec, Inc. was incorporated as a New York business corporation on September 25, 1996. Upon its incorporation, the company acquired numerous patents, inventions and know-how created for more than fifty years by Vernon E. Gleasman and his sons, James and Keith Gleasman, a family with more than fifty years experience in the automotive industry. Upon its incorporation, the company commenced the development of its full terrain vehicle (“FTV”®) - the merger of the speed and handling of a truck with the full terrain capability of a tracked vehicle. Through the ongoing creation, development and improvement of its FTV, the company created the following inventions relating to six distinct fields of automotive and related technology. Each of the following has individual commercial potential:
(i)
Iso-torque® differential;
(ii)
infinitely variable transmissions (“IVT”) for diesel and gasoline engines;
(iii)
steering drive and suspension system for tracked vehicles;
(iv)
high speed, steel-reinforced rubber tracks;
(v)
hydraulic pump and motor;
(vi)
constant velocity joint mechanism.
As a family, the Gleasmans’ manufactured, operated and sold their own innovative products for the thirty years prior to the company’s incorporation. The Gleasmans’ knowledge of the automotive industry and its trends was the basis of the invention of the company’s FTV. The Gleasmans’ creativity, experience and expertise have been recognized worldwide - in particular, Vernon E. Gleasman was the recipient of the Society of Automotive Engineers’ 1983 Schwitzer Award for the most innovative new product at the Indianapolis 500 and the 2001 Distinguished Inventor of the Year Award granted by the Rochester Intellectual Property Law Association. In addition Vernon Gleasman was nominated for the Lemelson-MIT prize, one of, if not the, most prestigious engineering awards in the world. After a long and productive life, Vernon Gleasman passed away on November 19, 2004 at age 92.
At the present time, management believes there is no worldwide, patented tracked vehicle with the high speed (highway driving speeds) and handling characteristics of the company’s FTV. To facilitate the development of the FTV the company had to resolve numerous engineering hurdles and the company’s success in so resolving these engineering problems led to the inventions described above. The company’s first generation FTV prototype was completed in February, 1999 and was initially showcased to the public in early spring, 1999. We have continued to improve the FTV since its introduction in the spring of 1999.
The company and its wholly-owned subsidiaries rely on the full-time services of James Y. Gleasman, its chief executive officer and Keith E. Gleasman, its President, a staff of six highly qualified engineering consultants and an administrative staff consisting of three full-time consultants. The company also retains a full-time chief of security.
(b) Our Automotive Properties
The following is an overview of our automotive technologies:
(1) Full Terrain Vehicle (FTV®)
Historically, wheeled trucks and cars have been able to travel at high speeds on prepared roads and are easy to drive and steer. However, wheeled trucks and cars have lacked the ability to traverse truly difficult terrain. On the other hand, tracked vehicles have the ability to traverse truly difficult terrain but are difficult to steer precisely, are cumbersome to drive and are limited to relatively low speeds even on prepared roads.
The company’s production-ready full terrain vehicle is a new type of vehicle which management believes combines the high speed capabilities of trucks and cars with the high traction capabilities of tracked vehicles. The FTV incorporates two company inventions - the steering drive and suspension system for tracked vehicles and high speed steel-reinforced rubber tracks. The company has tested the FTV over the past years. It has and continues to demonstrate the FTV in person to representatives of many governmental entities and private sector automotive companies as well as to many Tier I and Tier II automotive and truck componentry suppliers who are potential suppliers of the company’s FTV.
Based upon these tests, demonstrations and the reaction of governmental and industry representatives, the company believes it has shown that the FTV is relatively easy to drive and steers as easily as a car and that it has shown that this tracked vehicle can traverse almost any terrain, with highway driving speeds being attainable on pavement and other relatively flat surfaces. The company also believes that it has shown that the FTV is also environmentally sensitive since its low ground pressure of approximately 2 pounds per square inch, does not damage paved road surfaces or leave ruts or cause potholes on unpaved surfaces. In comparison, a person displaces approximately 5 to 7 pounds per square inch. The FTV is able to perform as it does because of its unique steering mechanism, which is protected by several U.S., European and Asian patents. This steer-drive mechanism can best be described in engineering terms as a hydro-mechanical steering mechanism. The “mechanical” portion is manufactured from conventional, high volume gearing, while the “hydro” portion is provided by a hydraulic pump and motor.
It should be noted that unlike the United States, the vast majority of third world country roads are unpaved. The FTV is a highly desirable vehicle in these countries given their poor road conditions and weather extremes. The market is significant - approximately 4,000,000 four wheel drive vehicles and light trucks are sold in the Asian, African, Central and South American markets annually (Automotive News, March 2003).
(2) IsoTorque® Differential
In 1951, Vernon E. Gleasman invented the dual-drive differential (the Torsen®). For the next thirty years, Vernon Gleasman and his sons manufactured and marketed this differential for the military, for incorporation in high performance cars, off road cars and 4x4 trucks. In 1982 the Gleasman family sold the Torsen differential to the unrelated Gleason Corporation (for further information on the Torsen, explore “Torsen” on the Google web searcher).
The company believes its IsoTorque® differential is dramatically less expensive, more efficient, lighter, and outperforms the Torsen. The Torsen is standard equipment on many major automobiles including Lexus, Mazda, Toyota, Audi, Land Rover, GM vehicles and others. The major hurdle to the Torsen’s utilization in a larger percentage of cars and trucks is price and weight. The company believes it’s the IsoTorque differential that eliminates these barriers.
The company has been working with a number of Nissan-sponsored race car teams. The IsoTorque has proven to operate in the manner the company anticipated-it has, in the company’s opinion, shown itself to be an extremely reliable and efficient differential. Reliable-the race cars have used the IsoTorque differential for a complete racing season with no failures compared to conventional limited-slip differentials which experience failure after a few races. Efficient-the IsoTorque-equipped cars improved the lap times of non-Isotorque-equipped cars by one (1) to two (2) seconds per lap. In addition, according to the race car drivers, the handling and safety of the vehicle was greatly improved.
Interest in the IsoTorque differential has spread to several domestic automotive and truck companies.
(3) Infinitely Variable Transmission - Hydraulic Pump/Motor
The company variously has developed three distinct generations of infinitely variable transmissions for diesel and gasoline engines, namely, the first generation, hydro mechanical transmission configured for our Dodge Ram diesel 4x4, including an all-hydraulic variation configured for gasoline engines (2003, 2004 ) a second generation, modular, hydro mechanical transmission configured for both gasoline and diesel engines ( 2005 ) and the third generation, single hydraulic unit configured for both diesel and gasoline engines (2006). Each transmission provides an uninterrupted drive through an infinite number of speed ratios, allowing ideal torque flow to propel the vehicle while permitting the engine to run at optimum efficiency. The company believes that the next generation of diesel engines with state-of-the-art electronics will allow interfacing and provide the necessary mechanisms to adequately control the infinitely variable transmission. Industry data has shown that the use of continuously variable and infinitely variable transmissions improves the fuel efficiency of all engines (gas/diesel), thus leading to reduced pollution. The company believes its testing has proven that its infinitely variable transmission will permit automotive diesel/gasoline engines to operate at ideal combustion rates which will reduce pollution and provide improved fuel economy while operating.
In addition to having the potential of reducing diesel particulates and nitrogen-oxide, the company’s transmissions are less complicated and have approximately 2/3 fewer parts when compared to a conventional four or five speed automatic transmission, making it smaller in size and lighter in weight. The company’s transmissions, which the company believes will be simpler and less expensive to manufacture than conventional transmissions, should provide the automotive industry with a higher performing product at a lower manufacturing cost.
In December, 1999, the company finished an extensive CAD/CAM evaluation of its first generation infinitely variable transmission. The evaluation included finite element analysis, fluid dynamics analysis and material compatibility analysis for “real world conditions” under temperatures ranging from minus 20 degrees Fahrenheit to 120 degrees.
During the summer and fall of 2003, the company installed its first generation transmission configured for a 2003 Dodge Ram 3/4 ton 4x4 quad pick-up truck, with an electronically controlled 2004 emissions compliant Cummins turbo-diesel engine. This engine is 5.9 liters in displacement, 250 bhp at 2900 rpm and has 460 lb-ft of torque at 1400 rpm. We chose this engine size because it represents a huge market - SUVs, light trucks, delivery trucks, school buses, airport shuttle buses and class 3 to 5 trucks.
The company next engaged the independent engineering firm of Viewpoint Systems, Inc. (a “Select Integrator” of National Instruments) to conduct a series of fuel-efficiency tests on the transmission. Viewpoint’s tests, consisting of measuring replacement fuel by driving at steady-state on a closed course (i.e. racetrack) using the average of five test runs, demonstrated that the company’s 3/4-ton 4x4 Dodge Ram truck, utilizing the company’s first generation infinitely variable transmission with a diesel engine, generated a 96% improvement in fuel mileage over that obtained by a gasoline-powered, 4-speed automatic 4x4 truck of comparable weight and horsepower to the most popular SUVs. The tests also confirmed that the company’s 3/4 ton diesel truck:
•
generated a 28.5% improvement in fuel efficiency over a same model Dodge 4x4 diesel truck with a manual transmission.
In addition to demonstrating that our first generation transmission achieved superior fuel economy, the tests also confirmed that two other objectives, long sought by the automotive industry, were achieved:
•
the elimination of “vehicle creep”, a characteristic of an automatic transmission vehicle at rest without application of the brake;
•
interchangeability, i.e. the transmission fit in the same space as an existing automatic transmission, thus, eliminating the need for major costly design changes to car and truck frames;
In April, 2004, we tested our hydraulic pump at the U.S. Environmental Protection Agency’s national laboratory in Ann Arbor, Michigan in order to determine its efficiency and to answer the question whether the first generation transmission which had been configured for the diesel Dodge Ram in 2003 could be adapted to a gasoline engine. This determination was necessary because diesel engines operate at low rpm and generate high torque, in contrast to gasoline engines that operate at high rpm and generate little torque and low fuel efficiencies at low rpm.
The question of suitability of our transmission for a gasoline engine lay primarily in the mechanical and volumetric efficiencies of our hydraulic pump and motor. We therefore installed our pump and motor as a stand alone transmission in a Tahoe and conducted a series of exhaustive tests, facilitated by our acquisition of a state-of-the-art dynamometer. Our tests were designed to demonstrate our transmission’s compatibility with a gasoline engine, its operating efficiencies, its durability and the fuel economy obtainable with the unit.
During this period, we made a number of improvements to the transmission, including creation of a more robust design for our hydraulic pump/motor units as well as improving their operating efficiencies.
We compared our all-hydraulic transmission to the Tahoe’s automatic transmission in side-by-side tests under simulated city driving scenarios, such as those found in New York City, Chicago, Los Angeles, Rio de Janeiro and Beijing. We then ran a series of side-by-side comparisons utilizing the then EPA-sanctioned New York City cycle test. Over the course of all of these tests, the all-hydraulic transmission achieved an average 4.33% improvement in fuel efficiency over the Tahoe automatic.
Having demonstrated the efficiencies of our transmission in the Dodge Ram diesel and the efficiencies of our all-hydraulic transmission in the Tahoe, we configured the two as a second generation, “modular” hydro mechanical infinitely variable transmission and in the third quarter of 2005, installed this unit in the Tahoe. We then proceeded to run this transmission under a “full load” (full vehicle weight, 5575 lbs., load resistance on our Mustang dynamometer) to both break it in and determine its mechanical capabilities. At the same time, we fine-tuned the computer software program we are using to control the transmission’s operation to enable us to accelerate, decelerate and break the vehicle and to perform the “steady state” tests requested of us by auto manufacturers.
During the course of refining the company’s second generation transmission, the company developed a new, third generation infinitely variable transmission which uses only one hydraulic mechanism (as opposed to both a pump and motor) and operates by slowing down an internal gear in the planetary gear arrangement to change its infinite ratios so that when the gear stops rotating, the transmission is in over-drive. At this point, the hydraulic mechanism is not operating and the transmission is operating entirely on its gears, thus achieving maximum efficiency. The company’s third generation transmission enhances engine management due to the seamless shifting of gear ratios through the control of only a single hydraulic device as opposed to the control of multiple clutches, brake bands and planet assemblies in relation to the automatic’s torque converter’s torques and speeds(i.e. creating multiple steps and engine speed changes). The third generation transmission has no clutches to engage and disengage, is smaller and more compact than conventional automatic transmissions as well as “innovative” constant velocity transmissions (“CVTS”), is not horsepower limited since the company’s transmission can be tailored to the smallest motorized vehicle as well as to the largest motorized vehicle, is interchangeable with any power source, e.g. diesel, gas, electric etc and lends itself to hydraulic and/or electric hybridization and is significantly less costly to manufacture than conventional transmissions due to its approximately 180 part count.
We have now produced the final design for our infinitely variable transmission. We have incorporated the best of all our previous designs. We began testing this unit in March, 2008. Using industry-accepted and EPA-sanctioned procedures, we ran identical side-by-side comparisons of the IVT to a four-speed automatic transmission utilizing the EPA-sanctioned New York City cycle test. The company’s IVT consistently achieved an approximate 20% gain in fuel economy as well as a dramatic reduction in particulates using filtered paper on the exhaust outlet.
Our testing used a torque-load cell between the engine and the transmission, the most accurate and latest computer software and hardware, Maxx fuel-flow meters accurate to one-tenth of one percent and a Mustang chassis dynamometer to collect extremely accurate and repeatable data.
Constant Velocity Joint Mechanism
Present day constant velocity joint technology was developed over eighty years ago and has remained virtually the same with a few minor improvements. Existing constant velocity joints function by allowing hardened steel balls to slide in hardened, steel curved tracks. This design creates an inherent lubrication problem as the balls move through their cycle. An additional, inherent weakness of this design is that torque is transferred by balls in a concentrated sliding contact point. Traditional constant velocity joint technology, therefore, requires tailor-made high pressure lubrication and extremely tight tolerances to function properly. Further, conventional constant velocity joint technology requires extensive, very accurate grinding on all surfaces, including the “inner and outer raceways”, i.e. the curved tracks. The ball cage must be spherically ground, both inside and outside. This grinding is done with ball grinders which lose tolerance very quickly, thus necessitating constant replacement. The ground surfaces are very hard and require a precision surface finish such that the hardened metal balls will fit exactly.
Our first rendition of the constant velocity joint uses gears rather than sliding balls to function. The gears have line contact, spreading the load over a long line, creating a rolling motion that is approximately 98% efficient. The company’s constant velocity joint, therefore, does not require high pressure lubrication and requires only conventional automotive tolerances to function. In addition, the company constant velocity joint design eliminates the need for extensive grinding, including the need for ball grinders.
We have continued development of our constant velocity joint technology in order to reduce complexity and manufacturing cost and improve functionality and efficiency. In this “next generation” version of the technology, we have retained our patented spherical gear design but have replaced the outer gear teeth with hardened steel balls while eliminating the expensive curved ball tracks and the internal steel cage. The balls now sit in a pocket and during operation perform a rolling rather than a sliding motion. The balls are the functional equivalent of a bearing which provides long life, greater efficiency and because it is relatively inexpensive to drill and size the holes for the steel balls, reduces overall manufacturing costs.
Management believes that we have significant competitive advantages consisting of less weight, less cost, higher operating angles and greater efficiencies.
On December 12, 2007, the company granted High Density Poweretrain, Inc. of Waterford, Michigan (“HDP”) an exclusive, worldwide license to incorporate the company’s constant velocity joint technology in HDP’s family of highly-powered, multifueled, fuel efficient, light weight, cost effective internal combustion engines. In consideration for the grant of the license, the company will receive annual royalties equal to 5% of annual gross revenues generated by the sale of HDP’s multifuel engines, including all sublicense of such technology. There are no minimum royalty payments and the grant does not affect the company’s ability to commercialize its constant velocity joint technology in any other field and/or application. At December 31, 2008, the company did not earn any royalties under this agreement.
(c) Our Ice Technology
On November 29, 2000, the company acquired Ice Surface Development, Inc. (“ISDI”), from UTEK Corporation, 202 South Wheeler Street, Plant City, Florida 33566. As a result of the merger, the company acquired a 20-year, exclusive worldwide license granted by the Trustees of Dartmouth College for land-based motorized applications to a novel ice adhesion modification system developed by Professor Victor F. Petrenko at Dartmouth’s Thayer School of Engineering.
Since its acquisition of the ice technology license from Dartmouth College, the company worked with Dr. Petrenko to refine the various methods for deicing and, during the same period, used its best efforts to sublicense such technology to one or more domestic and/or foreign glass manufacturers, automotive companies and other potential end-users. A considerable amount of the additional development work was performed at the Dartmouth College’s center for ice technology on the college’s campus, which work was supervised by Dr. Petrenko.
During the period beginning November 29, 2000 through to the year ending December 31, 2006, Dr. Petrenko’s efforts to develop the technology to where it would be capable of deicing large surface areas, such as the windshield of a car, truck and/or bus, appeared to be making steady progress. In addition, numerous companies, especially certain major glass manufacturers, continued to express relatively high interest in sublicensing the technology from the company or, at a minimum, provide dollars to the company to accelerate the development process.
However, despite the company’s best efforts, no glass manufacturer or other third party expressed continuing interest in sublicensing the technology from the company given its current stage of development. Moreover, no glass company or other third party was willing to provide the company with the development dollars necessary to enable the technology, even utilizing the pulse method favored by Dr. Petrenko, to deice relatively large surfaces within acceptable automotive power requirements.
During late 2006, the company was informed by Dr. Petrenko that while the physics underlying the ice technology is still valid and the technology remains promising, he could not estimate with any degree of assurance a time frame when the technology would be mature enough for automotive commercialization.
Given Dr. Petrenko’s assessment with respect to the ice technology and the reticence of glass companies to either sublicense or provide the company with development dollars, management concluded that the carrying amount of its Dartmouth College license as of December 31, 2006 ($1,071,000) exceeded the estimated cash flows the company reasonably expected to receive and therefore, determined that the full amount of such excess should be recorded as an impairment in accordance with SFAS No. 144 as of and for the year ended December 31, 2006.
During the first six months of 2007, the company and Dr. Petrenko discussed the terms and conditions under which the company would accept the offer of Dr. Petrenko to reacquire the ice technology license.
Effective June 15, 2007, the company assigned all of its right, title and interest in and to the license to Dr. Petrenko’s company (Ice Engineering, LLC) in exchange for a royalty interest equal to 5% of the gross revenues generated by the license and the assumption of the company’s obligations to Dartmouth College under the license.
Separately, Ice Engineering, LLC agreed to reimburse approximately $3,500,000 of acquisition and maintenance costs expended by the company in connection with the ice technology. Pursuant to the reimbursement agreement, the company received $500,000 on June 15, 2007. Under the license assignment agreement, the $3,000,000 balance is to be paid at the rate of $300,000 per quarter commencing March 1, 2008, less approximately $91,000 in fees payable to Dartmouth College accrued through June 14, 2007 to be deducted from the first quarterly installment amount.
The company received the first quarterly installment of $209,000, due March 1, 2008, on April 3, 2008. The company did not receive payment of the installments due June 1, 2008, September 1, 2008 and December 1, 2008 and Ice Engineering has apparently repudiated its remaining payment obligations under the agreement. On October 31, 2008, the company commenced an action in New York State Supreme Court, County of New York, Commercial Division against Ice Engineering, LLC seeking the total balance owed by Ice Engineering to the company pursuant to the June 15, 2007 agreement, namely $2,700,000. Ice Engineering has counterclaimed for the approximate $800,000 paid under the agreement thus far, alleging that the company failed to deliver certain “business information” to Ice Engineering as called for under the agreement.
The company has accounted for the receipt of installment proceeds as a recovery of its cost since such amounts represent an initial payment and is subject to additional installments and when payments received exceed the cost accumulated, revenue will be recorded under the cost recovery approach to the extent that the proceeds exceed the basis.
(d) Current Status of Product Development
A complete discussion concerning the current status of product development, including a description of current-revenue generating projects, is found under the caption “Management Discussion & Analysis of Financial Condition and Results of Operations.”
(e) Competition, Industry and Market Acceptance
The company believes that its automotive technology is superior to similar products manufactured in the worldwide automotive industry and in many instances represents a true paradigm shift with respect to presently known technology. However, through December 31, 2008, the company has not generated significant revenues from operations. It has taken the company time (due to both cash-flow restraints existing from time to time and the increasing demand on the part of the industry for production-ready prototypes) to develop its products so that each automotive product is ready for commercialization and production-ready.
Beginning in 2006, the company initiated a series of programs designed to demonstrate its FTV®®, IsoTorque® differential, infinitely variable transmission and constant velocity joint to representatives of multiple domestic and foreign automobile manufacturers and first-tier suppliers to the automotive industry.
The company’s ability to generate revenue and become profitable is considerably dependent upon acceptance by automotive manufacturers and/or first-tier suppliers of the technical superiority of the company’s products, their generally lower manufacturing costs, their generally lighter weight and beneficial impact upon the competitive, worldwide demand for raw materials and their environmentally-friendly attributes. The automotive industry, however, has committed substantial resources to product systems utilizing old technology as well as to new product systems (e.g. hybrids) which the industry believes may fulfill its short and long term needs. In addition, the industry historically has been characterized by a resistance to embracing new technologies from sources outside of the industry’s own research and development units (the “not invented here” syndrome).
Essentially, the market for all of the company’s automotive technologies, except for the FTV®, is occupied by competing products manufactured and/or utilized by the very manufacturers and/or first tier suppliers which the company is attempting to attract. Thus, management is challenged to demonstrate that the company’s automotive technologies will result in a greater market share for the acquiring and/or licensing manufacturer and/or first-tier supplier, if not initially, then over a finite period of years (generally, in no case greater than the existing or expected patent protection for the technologies). Such demonstration, including significantly the expected revenues and profits to be achieved by virtue of such increased market share, becomes the basis for an evaluation of the company’s automotive technologies with such evaluation designed to generate a fair and adequate price for such technologies.
As the result of its initiatives commencing in 2006 and more fully implemented in 2007 and 2008, the company is currently engaged in a number of projects with domestic and foreign enterprises, as well as the National Aeronautics and Space Administration, with respect to its IsoTorque® differential, constant velocity joint technology and infinitely variable transmission technology. The projects generally are revenue-producing and involve tailor-making design-specific applications of these technologies for the end-user’s specifications.
The company’s FTV® is a unique vehicle which has no direct, market competitor. Management’s opinion with respect to the uniqueness of the FTV was confirmed by the United States Air Force purchase of an FTV prototype on a “sole source” basis in the fall of 2008.
The company’s FTV can traverse road and off-road conditions, especially in the target market countries of Asia, Africa, Central and South America, which cannot be traversed by 4X4s at all. Secondly, no other comparable tracked vehicle can match the FTV’s speed (50-60mph) under normal road conditions. Consequently, at present, there is no identifiable category of vehicle that encompasses all of the capabilities of the FTV. The market for such a vehicle is, in a sense, “wide-open” and will be a composite of vehicles whose purpose is the transportation of people and goods in areas where highway infrastructure is poor or even nonexistent, vehicles for agricultural use that will eventually replace tractors and other traditional farm vehicles, vehicles for exploration, search, rescue and other emergencies as well as vehicles for military purposes. The challenge with respect to the profitable commercialization of the FTV is to demonstrate to potential buyers and/or licensees the FTV’s potential positive socioeconomic impact, on a year around basis, upon the communities in which it is introduced.
North American markets for the FTV include forestry, farming and ranching, mining, environmental protection, fire and rescue, border patrol, pipeline inspection, oil and gas exploration, construction, transportation and recreation.
Item 1A.
Item 1A. RISK FACTORS
The company faces a variety of risks inherent in perfecting its automotive technologies to production-ready models and in attempting to commercialize these technologies to generate revenues and profits. Management discusses below certain significant factors that could adversely affect the company and its prospects. Other factors may exist that the company cannot anticipate or that the company does not consider significant based upon information currently available. Additionally, because of the following risks and uncertainties, as well as other factors that could affect the company’s financial condition, the company’s past financial performance should not be considered as an indicator of future performance.
(1) The company has limited operating history, has not generated significant revenues since its founding in 1996 and may have to sell shares of its common and if possible convertible Preferred stock to continue and/or expand business operations. In these circumstances, management has expressed its opinion that without sufficient additional capital or long-term debt and ultimately, profitable operations, the company will not be able to continue as a going concern. As a result of Limited Capital resources and recurring net losses, our auditors have disclosed in their report on our financial statements that there is a substantial doubt about our ability to continue as a going concern.
(2) The company’s ability to generate significant revenue and sustainable profits is dependent upon its ability to demonstrate the technological superiority of its automotive technologies, their lower manufacturing costs, generally fewer parts and lighter weight, greater affinity for environmentally-sound applications and their beneficial impact upon the worldwide consumption of increasingly-scarce raw materials to an automotive industry that is heavily invested in conventional technologies and resistant to new technology unless developed by the auto companies themselves.
(3) The only market for the company’s automotive products is an automotive industry that, due to the current economic downturn, is curtailing research and development expenditures, undergoing significant management and corporate reorganization and delaying new product development. Such circumstances may delay the company’s ongoing projects with the industry or curtail one or more of them altogether.
(4) In the event the company were unable to sell and/or license any of its automotive technologies to one or more automotive companies, first-tier suppliers, government agencies and/or the U.S. military, the company may have to embark upon the commercialization of one or more of its technologies itself, a situation which would require considerably more capital, personnel, regulatory compliance, time and other resources than is presently available to the company.
(5) The company’s common stock is traded on the over-the-counter bulletin board (OTCBB), an electronic inter-dealer quotation system, and is not listed for trading on any domestic or foreign securities exchange, including the National Association of Securities Dealers, Inc. (NASD). Consequently, the company is not required to meet certain quantative and qualitative listing standards established by such exchanges for the protection of investors.
(6) The market for the company’s common stock is extremely limited, meaning that at any time and from time to time, there may not be enough sellers in the market to fill purchase orders and/or enough buyers in the market to fill sell orders for transactions where a given price is stipulated (i.e. “limit orders”). Such orders, therefore, may expire unfilled.
(7) The company’s common stock is volatile, meaning that purchase and/or sell orders for a numerically small number of shares (e.g. 500) may have a disproportionate positive or negative impact on the trading price at any time during any given trading day but especially, during the first and the last half-hour of trading.
(8) The market for the company’s common stock is disproportionately influenced by market makers (i.e. broker/dealers) who agree to buy a limited number of the company’s common shares [e.g. 500 share blocks] during the course of a given trading day at various specified prices [ the “bid"]) who may negatively affect the trading price by periodically “lowering the bid” for the company’s common stock without regard to company performance and/or disclosure of material events regarding the company’s activities.
(9) The price of the company’s common stock may be negatively influenced by significant “sell-side pressure” initiated by “short sellers” of the company’s stock. Short selling is simply selling a security that is not owned by the seller at the time of the sale. Short selling is generally accomplished by the investor borrowing the shares from an otherwise nonselling shareholder. The short seller’s profit is made when he purchases the number of shares borrowed at a price lower than the price at which he sold the borrowed shares.
(10) Unless the trading price for the company’s common stock is $5.00 or more, the stock constitutes “penny stock” requiring broker/dealers to determine whether the company’s stock is a “suitable” investment for his customer, requiring disclosure to the customer of certain bids, offers and quotations at least two days before executing a transaction and additionally requiring the broker/dealer to deliver certain information regarding the risks generally associated with penny stocks (e.g. lack of liquidity, volatility and the potential that the investor will lose his entire investment) at least two days prior to executing a penny stock transaction. These requirements may reduce the number of individuals who otherwise may purchase the company’s common stock in the open market.
Item 1B.
Item 1B. UNRESOLVED STAFF COMMENTS
Not Applicable.
Item 2.
Item 2. PROPERTIES
During 2006 and part of 2007, the company leased executive office space at Powder Mills Office Park, Pittsford, New York and leased research, development and manufacturing space in Webster, New York. The company terminated its Powder Mills lease as of June 30, 2007 and its Webster lease as of December 31, 2007 in order to access additional manufacturing and assembly space and to consolidate its executive and manufacturing functions under one roof. The company was released from all further obligations under these leases.
On September 14, 2007, the company moved to a new facility located at 1999 Mount Read Blvd., Rochester, New York. The facility consists of approximately 13,650 sq. ft., with executive and engineer offices, conference room, “clean room,” manufacturing and assembly space, automotive bays, dynamometer and lift facilities and approximately thirty acres of land suitable for vehicle testing and demonstration. On April 29, 2008, the company executed a five-year lease for the premises (with a December 1, 2007 lease commencement date) providing for rent to be paid at a rate of $5,687.00 per month ($68,244.00 per annum) and in addition, for the payment of the company’s proportionate share of yearly real estate taxes and yearly common area operating costs. Under the lease, monthly rental payments commenced June 1, 2008. The lease contains three 5-year renewal options and grants an option to the company to lease up to an additional 7,000 sq. ft. of adjacent manufacturing and assembly space.
Rental payments and certain other payments due to the landlord is to be paid in common shares of the company, based upon the closing price per share on the 15th day of the calendar month immediately prior to the date any installment payment of monthly rent or other payment is due landlord.
The company believes that, given its present circumstances, the facilities located at Mount Read Blvd. are sufficient to meet the company’s anticipated plant requirements for the next twelve months. This situation could change if the company were to receive one or more orders requiring volume production of one or more of its technologies and the company were to elect to fill any such orders itself.
Item 3.
Item 3. LEGAL PROCEEDINGS
(1)
On September 30, 2005, the company filed a declaratory judgment action in the Supreme Court of the State of New York for the Seventh Judicial District seeking that court’s determination that certain, purported agreements with a management consulting firm are null and void and unenforceable as against the company, its officers and directors. This litigation has been settled and, in accordance with the terms of the settlement agreement executed March 6, 2009, the parties released one another from all claims and counterclaims against each other and terminated any and all obligations emanating out of their relationship with each other, including any and all obligations under the purported agreements.
(2)
On April 12, 2007, the company commenced a second lawsuit against the same management consulting firm in the Supreme Court, Seventh Judicial District, alleging that such firm had fraudulently induced the company to enter into certain purported agreements with the management firm, did not perform the services for which the company had engaged the firm and that, as a result, the company has been damaged in excess of $6,000,000 by such firm. This litigation has been settled and, in accordance with the terms of the settlement agreement executed March 6, 2009, the parties released one another from all claims and counterclaims against each other and terminated any and all obligations emanating out of their relationship with each other, including any and all obligations under the purported agreements.
(3)
On October 8, 2007, the controlling persons of the company’s majority-owned subsidiary, Ice Surface Development, Inc.(“ISDI”), namely its chief executive officer, its chief operating officer and its vice-president of manufacturing, filed for arbitration of their claims that ISDI is obligated to pay them certain amounts under their employment contracts.
On October 19, 2007, the same three persons commenced a shareholders’ derivative action in the Federal District Court for the Western District of New York claiming that the company and its president breached their fiduciary duties to the minority shareholders of ISDI in assigning the Dartmouth College ice technology license for inadequate consideration.
On June 27, 2008, the Federal Court dismissed, with prejudice, the shareholders derivative action and the deadline for appealing the decision has expired.
On August 18, 2008, the plaintiffs withdrew their arbitration claim, thus ending the litigation in its entirety.
(4)
On October 31, 2008, the company commenced an action in New York State Supreme Court, County of New York, Commercial Division against Ice Engineering, LLC seeking the total balance owed by Ice Engineering to the company pursuant to an agreement entered into by the parties, effective June 15, 2007, namely, $2,700,000. Under the agreement, in connection with Torvec’s assignment of the ice technology license, Ice Engineering agreed to reimburse Torvec for approximately $3,500,000 the company previously had expended acquiring and maintaining the license. Ice Engineering has paid approximately $800,000 but is in arrears with respect to installments due June 1, 2008, September 1, 2008 and December 1, 2008 and apparently has repudiated its remaining payment obligations under the agreement. Ice Engineering has counterclaimed for the $800,000 paid under the agreement thus far, alleging that the company failed to deliver certain “business information” to Ice Engineering as called for under the agreement.
Item 4.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to the company’s shareholders during the fourth quarter of the year ending December 31, 2008.
Subsequent Event
The annual meeting of the company’s common shareholders was held on January 29, 2009. At the meeting, at which a quorum of the requisite number of common shares under the company’s bylaws for the conduct of business was present either in person or by proxy (27, 159,425 common shares out of 32,695,556 common shares outstanding on the record date), the following items were voted on by the shareholders with the following results:
1.
Election of Directors
2.
Ratification of the appointment of Eisner LLP by the Audit Committee of the board of directors as the Independent Registered Public Accounting Firm of the company for its year ending December 31, 2008.
Item 5.
Item 5.
MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
(a) Market Information
Effective September 23, 1998, the company’s $.01 par value common stock, as a class, was registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934. As a result, shares of the company’s common stock which had been owned for one year or more became eligible for trading on the over-the-counter bulletin board maintained by the National Association of Securities Dealers, Inc. on December 22, 1998 (“NASD”). The company’s stock began trading on January 21, 1999 at $12.00 per share. The company has approximately 25 market makers for its common stock.
The company’s stock is traded on the over-the-counter bulletin board (OTCBB). The OTCBB is an electronic inter-dealer quotation system that displays real-time quotes, last-sale prices and volume information for shares of over-the-counter companies which file current financial reports with the Securities and Exchange Commission or, if applicable, such companies’ banking or insurance regulators. The NASD oversees the OTCBB.
The following table presents the range of high and low closing prices for the company’s $.01 par value common stock for each quarter during its last two calendar years. The source of the high and low closing price information is the OTCBB. The market represented by the OTCBB is extremely limited, is heavily influenced by market makers and the price for our common stock quoted on the OTCBB is not necessarily a reliable indication of the value of our common stock. The company also believes that the price of its common stock is significantly impacted by short-selling. Quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.
(b) Holders of Common Stock
As of December 31, 2008, the company had approximately 297 shareholders of record and an estimated 3,600 beneficial owners of its common stock. As of December 31, 2008, the company had 32,811,422 common shares issued and outstanding.
(c) Dividend Policy on Common Stock
The company has not paid any dividends on its common stock since its inception. The declaration or payment of dividends, if any, on the company’s common stock is within the discretion of the board of directors and will depend upon the company’s earnings, capital requirements, financial condition and other relevant factors. Given the company’s current financial condition,, the board of directors does not intend to declare or pay any dividends on its common stock and intends to retain any earnings to finance the growth of the company. In the event the company generates revenues as the result of one of more commercial transactions, the board intends to seek every opportunity to be in a position to declare dividends.
The payment of dividends on the company’s common stock is limited by provisions of the New York Business Corporation Law which permits the payment of dividends only if after the dividends are paid, a company’s net assets are at least equal to its stated capital. Payment of dividends on the company’s common stock is also subordinated to the requirement that the company pay all current and accumulated dividends on its Class A and Class B Preferred Shares prior to the payment of any dividends on its common stock.
(d) Securities Authorized for Issuance under Equity Compensation Plans
(e) Class A Preferred Stock
On August 30, 2000, the company amended its certificate of incorporation to permit the company to issue up to 100,000,000 shares of $.01 par value preferred stock. Under the amendment, the board of directors has the authority to allocate these shares into as many separate classes of preferred as it deems appropriate and with respect to each class, designate the number of preferred shares issuable and the relative rights, preferences, seniority with respect to other classes and to the company’s common stock and any limitations and/or restrictions that may be applicable without obtaining shareholder approval.
On January 30, 2002, the company engaged Pittsford Capital Group as its nonexclusive agent to raise up to $5,000,000 in capital through the sale of up to 2,000,000 shares of the company’s preferred stock. The board designated the preferred stock to be issued in the fund raising effort as Class A Preferred Shares (Class A Preferred). The relative rights, preferences and limitations of the Class A Preferred are as follows:
A.
Number of Shares
The number of Class A Preferred initially authorized is 3,300,000 Class A Preferred. The initial number authorized shall be increased as required to provide Class A Preferred for payment of dividends as described in Section B, distribution to holders in accordance with Section C and as described in Section F.
B.
Dividends
(i)
So long as any Class A Preferred is outstanding, the holders of the Class A Preferred will be entitled to receive cumulative preferential dividends in the amount of $.40 per share of Class A Preferred and no more for each annual dividend period. The annual dividend period shall commence on the first day of each March and shall end on the last day of the immediately succeeding February, which February date is referred to as the “Dividend Accrual Date”.
(ii)
When and as declared by the board, dividends payable on the Class A Preferred will be paid in cash out of any funds legally available for the payment of dividends or, in the discretion of the board, will be paid in Class A Preferred at a rate of 1 share of Class A Preferred for each $4.00 of dividends. No fractions of Class A Preferred shall issue. The Company shall pay cash in lieu of paying fractions of Class A Preferred on a pro rata basis.
(iii)
Dividends shall be cumulative from the date of issuance of each share of Class A Preferred, whether or not declared and whether or not, in any annual dividend period(s), there are net profits or net assets of the Company legally available for the payment of dividends.
(iv)
Accumulated and unpaid dividends on the Class A Preferred will not bear interest.
(v)
So long as any Class A Preferred is outstanding, the Company may not declare or pay any dividend, make any distribution, or fund, set aside or make monies available for a sinking fund for the purchase or redemption of, any shares or stock of the Company ranking junior to the Class A Preferred with respect to the payment of dividends, including the $.01 par value common stock of the Company (“Junior Stock”), unless all dividends in respect of the Class A Preferred for all past annual dividend periods have been paid and such dividends for the current annual dividend period have been paid or declared and duly provided for. Subject to the foregoing, and not otherwise, the dividends (payable in cash, stock or otherwise) as may be determined by the board, may be declared and paid on any Junior Stock from time to time out of any funds legally available therefore, and the Class A Preferred will be entitled to participate in any such dividends, whether payable in cash, stock or otherwise on a pro rata basis.
C.
Liquidation Rights
(i)
In the event of any liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, the holders of Class A Preferred then outstanding are entitled to be paid out of the assets of the Company available for distribution to its shareholders, whether such assets are capital, surplus or earnings, before any payment or declaration and setting apart for payment of any amount in respect of any shares of any Junior Stock with respect to the payment of dividends or distribution of assets on liquidation, dissolution or winding up of the Company, all accumulated and unpaid dividends (including a prorated dividend from the last Dividend Accrual Date) in respect of any liquidation, dissolution or winding up consummated except that, notwithstanding the provisions of Section B(ii), all of such accumulated and unpaid dividends will be paid in Class A Preferred at a rate of 1 share of Class A Preferred for each $4.00 of dividends. No fractions of Class A Preferred shall issue. The Company shall pay cash in lieu of paying fractions of Class A Preferred on a pro rata basis.
(ii)
The Class A Preferred will be entitled to participate on a pro rata basis in any distribution of assets as may be made or paid on Junior Stock upon the liquidation, dissolution or winding up of the Company.
(iii)
A consolidation or merger of the Company with or into any other corporation or corporations or any other legal entity will not be deemed to constitute a liquidation, dissolution or winding up of the Company as those terms are used in this Section C.
(i)
The Company may, in the absolute discretion of its board, redeem at any time and from time to time from any source of funds legally available any and all of the Class A Preferred at the Redemption Price.
(ii)
For each redemption, the Redemption Price for each share of Class A Preferred shall be equal to amount paid per share of Class A Preferred payable in cash, plus an amount payable (not withstanding the provisions of Section B (ii)) in cash equal to the sum of all accumulated unpaid dividends per share of Class A Preferred (including a prorated annual dividend from the last Dividend Accrual Date) to the respective date for each redemption on which the Company shall redeem any shares of Class A Preferred (the “Redemption Date”).
(iii)
In the event of redemption of only a portion of the then outstanding Class A Preferred, the Company will affect the redemption pro rata according to the number shares held by each holder of Class A Preferred.
(iv)
At least 20 days and not more than 60 days prior to the date fixed by the board for any redemption of Class A Preferred, written notice (the “Redemption Notice”) will be mailed, postage prepaid, to each holder of record of the Class A Preferred at his or her post office address last shown on the records of the Company. The Redemption Notice will state:
•
Whether all or less than all of the outstanding Class A Preferred is to be redeemed and the total number of shares of Class A Preferred being redeemed;
•
the number of shares of Class A Preferred held by the holder that the Company intends to redeem;
•
the Redemption Date and Redemption Price; and
•
that the holder is to surrender to the Company, in the manner and at the place designated in Section D(v), his or her certificate or certificates representing the number of shares of Class A Preferred to be redeemed.
(v)
On or before the date fixed for redemption, each holder of Class A Preferred must surrender the certificate or certificates representing the number of shares of Class A Preferred to the Company, accompanied by instruments of transfer satisfactory to the Company and sufficient to transfer the Class A Preferred being redeemed to the Company free and clear of any adverse interest, at the place designated in the Redemption Notice. The Redemption Price for the number of shares of Class A Preferred redeemed will be payable in cash on the Redemption Date to the person whose name appears on the certificate(s) as the owner of such certificate(s) as of the date of the Redemption Notice. In the event that less than all of the shares of Class A Preferred represented by any certificate(s) are redeemed, a new certificate will issued by the Company representing the unredeemed Class A Preferred to the same record owner.
(vi)
As promptly as practicable after surrender of the certificate(s) representing the redeemed Class A Preferred, the Company will pay the Redemption Price to the record holder of the redeemed Class A Preferred.
(vii)
Unless the Company defaults in the payment in full of the Redemption Price, the obligation of the Company to pay dividends on the Class A Preferred redeemed shall cease on the Redemption Date, and the holders of the Class A Preferred redeemed will cease to have any further rights with respect to such redeemed Class A Preferred on the Redemption Date, other than to receive the Redemption Price.
(viii)
The holders of the Class A Preferred have no right to seek or to compel redemption of the Class A Preferred.
E.
Voting Rights The holders of Class A Preferred are not be entitled to vote in any and all elections of directors and with respect to any and all other matters as to which the vote or consent of shareholders of the Company shall be required or taken.
F.
Conversion Privilege
(i)
The holders of the Class A Preferred have the right, at each holder’s option but subject to board approval in each case, to convert each share of Class A Preferred into 1 fully paid and nonassessable share of the $.01 par value common stock of the Company (“Common Share”) without payment of any conversion price or other consideration. Such 1 for 1 rate of conversion is subject to adjustment as set forth in F(x).
(ii)
The Conversion Privilege set forth in this Section F may not be exercised by the holder of Class A Preferred until 1 year shall have elapsed from the issue date of the Class A Preferred held by such holder and may not be exercised if the board shall not have approved the actual exercise of such Conversion Privilege by such holder of Class A Preferred. Such approval shall not be unreasonably withheld. Upon receipt of the Notice of Conversion described in Section F(iii) below and the board’s approval of such conversion, the Company shall give a Notice of Approval to the holder within 48 hours of the receipt of the Notice of Conversion that the exercise of the Conversion Privilege by such holder is approved.
(iii)
In order to exercise the Conversion Privilege, the holder of Class A Preferred must give written notice to the Company that the holder elects to covert the number of shares of Class A Preferred as specified in the Notice of Conversion. The Notice of Conversion will also state the name(s) and address (es) in which the certificate(s) for Common Shares issuable upon the conversion are to be issued. Upon receipt of the Company’s Notice of Approval, the holder of the Class A Preferred must surrender the certificate(s) representing the number of shares of Class A Preferred being converted to the Company, accompanied by instruments of transfer satisfactory to the Company and sufficient to transfer the Class A Preferred being converted to the Company free and clear of any adverse interest at the office maintained for such purpose by the Company. As promptly as practicable after the surrender of the certificate(s) representing the number of shares of Class A Preferred converted, the Company will issue and deliver to the holder, or to such other person designated by the holder’s written order, a certificate(s) for the number of full Common Shares issuable upon the conversion of the Class A Preferred in accordance with the provisions of this Section F(iii).
(iv)
The Conversion Privilege may be exercised in whole or in part and, if exercised in part, a certificate(s) will be issued for the remaining number of Class A Preferred in any case in which fewer than all of the Class A Preferred represented by a certificate(s) are converted to the same record holder of Class A Preferred converted.
(v)
Each conversion will be deemed to have been effective immediately prior to the close of business on the date on which the Class A Preferred will have been so surrendered as provided in Section F(iii) (the “Conversion Date”) and the person(s) in whose name(s) any certificate(s) for Common Shares will be issuable upon the conversion will be deemed to have become the holder(s) of record of the Common Shares on the Conversion Date. Effective as of the Conversion Date, the Company will have no obligation to pay dividends on the Class A Preferred converted provided that effective as of the Conversion Date, the Company shall pay all accumulated and unpaid dividends (including the prorated dividend from the last Dividend Accrual Date) on the Class A Preferred converted, payable in the discretion of the Board, in cash out of any funds legally available for payment of such dividends or in Class A Preferred.
(vi)
The Conversion Privilege shall terminate with respect to Class A Preferred called for redemption by the mailing of a Redemption Notice described in Section D(iv) on the close of business on the date immediately preceding the Redemption Date.
(vii)
Notwithstanding the requirement for board approval and the 1 year limit set forth in Section F(ii), in case of any consolidation or merger to which the Company is a party other than a merger or consolidation in which the Company is the surviving corporation or in case of any sale or conveyance to another corporation of all or substantially all of the assets of the Company or in the case of any statutory exchange of securities representing an excess of 50% of the total outstanding securities of the Company with another corporation (including any exchange effected in connection with a merger of a third corporation into the Company), the holders of Class A Preferred then outstanding will have the right to convert the Class A Preferred into the kind and amount of securities, cash or other property which the holder would have owned or have been entitled to receive immediately after the consolidation, merger, statutory exchange, sale or conveyance, had the Class A Preferred been converted immediately prior to the effective date of the consolidation, merger, statutory exchange, sale or conveyance as the case may be.
(viii)
Notwithstanding the 1 year holding period set forth in Section F(ii), in the event the highest bid price for the Company’s $.01 par value common stock quoted on any exchange, automated quotation system or the OTC Bulletin Board on which such stock is actively traded is $20 or more on 5 consecutive trading days, the holders of Class A Preferred shall have the right to convert such Class A Preferred upon Board approval.
(ix)
Common Shares delivered upon conversion of Class A Preferred will be, upon delivery, validly issued, fully paid and nonassessable, free of all liens and charges and not subject to any preemptive rights.
•
Declares a dividend, or makes a distribution, on shares of its $.01 par value common stock in shares of its $.01 par value common stock; or
•
Subdivides its outstanding shares of its $.01 par value common stock into a greater number of shares of its $.01 par value common stock; or
•
Combines its outstanding shares of its $.01 par value common stock into a smaller number of shares of $.01 par value common stock, the number of Common Shares issuable upon the conversion of the Class A Preferred shall be adjusted at the time of the record date for the dividend or distribution or the effective date of the subdivision or a combination so that after such record or effective date, the holder of Class A Preferred will be entitled to receive the same percentage of ownership of the Company’s $.01 par value common stock as such holder would have been entitled to receive immediately prior to such record or effective date.
Pursuant to the offering, the company sold 38,500 shares of Class A Preferred for aggregate proceeds of $154,000 during the year ending December 31, 2002. The Pittsford Capital offering terminated on July 31, 2002.
Additional shares of Class A Preferred have been sold from time to time directly by the company in a number of private placements. During the years ending 2006, 2005, 2004 and 2003, the company sold 273,250, 200,000, 238,075 and 15,687 Class A Preferred for proceeds of approximately $1,093,000, $800,000, $952,300 and $62,748, respectively. No shares of Class A Preferred were sold during the year ended December 31, 2008.
During 2004, holders of Class A Preferred converted 38,500 Class A Preferred into 38,500 common shares and received dividends of 8,031 Class A Preferred upon conversion. In 2004, the 2,550 Class A Preferred issued as dividends were converted into 2,550 common shares.
32,305 Class A Preferred (including 1,055 Class A Preferred issued as dividends) were converted into 32,305 common shares during the year ended December 31, 2008.
At December 31, 2008, Class A Preferred dividends in arrears amounted to approximately $1,029,000.
(f) Class B Preferred Stock
On October 19, 2004, the company incorporated Iso-Torque Corporation in order to commercialize its Iso-Torque® differential technology.
In September, 2004, the company created a new series of preferred stock-Class B Non-Voting, Cumulative Convertible Preferred Stock (“Class B Preferred”) to fund the business operations of Iso-Torque Corporation.
The designation, relative rights, preferences and limitations of the Class B Preferred, as fixed by the board of directors, are as follows:
A.
Three hundred thousand (300,000) authorized preferred shares of the par value of $.01 each as fixed by the board of directors, , shall be issued in and as a series to be designated Class B Non-Voting Cumulative Convertible Preferred Shares, $.01 par value. Said series is hereinafter called “Class B Preferred Shares”. The term preferred shares as used herein shall include all 100,000,000 of the preferred shares, $.01 par value authorized by the Certificate of Incorporation of the Corporation of which Class B Preferred Shares is the second series.
B.
(1) So long as any Class B Preferred are outstanding, the holders of the Class B Preferred will be entitled to receive cumulative preferential dividends in the amount of $.50 per share of Class B Preferred and no more for each annual dividend period. The annual dividend period shall commence on the first day of each September and shall end on the last day of the immediately succeeding August, which August date is referred to as the “Dividend Accrual Date”.
(2) When and as declared by the board, dividends payable on the Class B Preferred will be paid in cash out of any funds legally available for the payment of dividends or, in the discretion of the board, will be paid in Class B Preferred at a rate of 1 share of Class B Preferred for each $5.00 of dividends. No fractions of Class B Preferred shall be issued. The Corporation shall pay cash in lieu of paying fractions of Class B Preferred on a pro rata basis.
(3) Dividends shall be cumulative from the date of issuance of each share of Class B Preferred, whether or not declared and whether or not, in any annual dividend period(s), there are net profits or net assets of the Corporation legally available for the payment of dividends.
(4) Accumulated and unpaid dividends on the Class B Preferred will not bear interest.
(5) So long as any shares of Class B Preferred are outstanding, the Corporation may not declare or pay any dividend, make any distribution, or fund, set aside or make monies available for a sinking fund for the purchase or redemption of any shares or stock of the Corporation ranking junior to the Class B Preferred with respect to the payment of dividends, including the $.01 par value common stock of the company, for all past annual dividend periods have been paid and such dividends for the current annual dividend period have been paid or declared and duly provided for. Subject to the foregoing, and not otherwise, the dividends (payable in cash, stock or otherwise) as may be determined by the Board, may be declared and paid on any Junior Stock from time to time out of any funds legally available therefore, and the Class B Preferred will be entitled to participate in any such dividends, whether payable in cash, stock or otherwise, on a pro rata basis.
C.
The Class B Preferred shall rank junior and be classified as Junior Stock with respect to the Corporation’s Class A Preferred Shares in all respects.
D.
(1) In the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, the holders of Class B Preferred then outstanding are entitled to be paid out of the assets of the Corporation available for distribution to its shareholders, whether such assets are capital, surplus or earnings, before any payment or declaration and setting apart for payment of any amount in respect of any shares of any Junior stock with respect to the payment of dividends or distribution of assets on liquidation, dissolution or winding up of the Corporation, all accumulated and unpaid dividends (including a prorated dividend from the last Dividend Accrual Date) in respect of any liquidation, dissolution or winding up consummated except that, notwithstanding the provisions of Section B(2), all of such accumulated and unpaid dividends will be paid in shares of Class B Preferred at a rate of 1 share of Class B Preferred for each $5.00 of dividends. No fractions of Class B Preferred shall be issued. The Corporation shall pay cash in lieu of paying fractions of Class B Preferred on a pro rata basis. (2) The Class B Preferred will be entitled to participate on a pro rata basis in any distribution of assets as may be made or paid on Junior Stock upon the liquidation, dissolution or winding up of the Corporation.
E.
(1) The Corporation may in the absolute discretion of its board, redeem at any time and from time to time from any source of funds legally available any and all of the Class B Preferred at the Redemption Price.
(2) For each redemption, the Redemption Price for each share of Class B Preferred shall be equal to the sum of $5.00 per share of Class B Preferred, payable in cash, plus an amount payable (not withstanding the provisions of Section B(2) in cash equal to the sum of all accumulated unpaid dividends per share of Class B Preferred (including a prorated annual dividend from the last Dividend Accrual Date) to the respective date for each redemption on which the Corporation shall redeem any shares of Class B Preferred (the “Redemption Date”).
(3) In the event of a redemption of only a portion of the then outstanding Class B Preferred, the Corporation will affect the redemption pro rata according to the number shares held by each holder of Class B Preferred.
(4) Unless the Corporation defaults in the payment in full of the Redemption Price, the obligation of the Corporation to pay dividends on the Class B Preferred redeemed shall cease on the Redemption Date, and the holders of the Class B Preferred redeemed will cease to have any further rights with respect to such redeemed Class B Preferred on the Redemption Date, other than to receive the Redemption Price.
(5) The holders of the Class B Preferred have no right to seek or to compel redemption of the Class B Preferred.
F.
The holders of Class B Preferred are not entitled to vote in any and all elections of directors and with respect to any and all other matters as to which the vote or consent of shareholders of the Corporation shall be required or taken.
G.
(1) The holders of the Class B Preferred have the right, at each holder’s option but subject to board approval in each case, to (i) convert each share of Class B Preferred into 1 fully paid and nonassessable share of the $.01 par value common stock of the Corporation (“Torvec Common”) without payment of any conversion price or other consideration. Such 1 for 1 rate of conversion is subject to adjustment as set forth in Section G(10); (ii) convert each share of Class B Preferred into 1 fully paid and nonassessable share of the $.01 par value common stock of Iso-Torque Corporation (“Iso-Torque Common”) without payment of any conversion price or other consideration upon the happening of any of the following events:
(a) the effectiveness of a registration statement as filed with the Securities and Exchange Commission pursuant to and under the Securities Act of 1933 with respect to an initial public offering of Iso-Torque Common; or
(b) the effectiveness of a registration statement as filed with the Securities and Exchange Commission pursuant to and under the Securities Exchange Act of 1934 with respect to an initial trading of Iso-Torque Common on a national exchange, the NASDAQ or the OTCBB; or
(c) notwithstanding the 1 year holding period set forth in Section G(2) the execution of a definitive agreement for the sale, transfer and/or exchange of all of the issued and outstanding Iso-Torque Common to a third party purchaser of such stock or by any of a business combination of Iso-Torque Corporation with an unrelated entity, other than a merger or consolidation in which Iso-Torque Corporation is the surviving corporation.
(2) The Conversion Privilege set forth in this Section G may not be exercised by the holder of Class B Preferred until 1 year shall have elapsed from the issue date of the Class B Preferred held by such holder and may not be exercised if the board shall not have approved the actual exercise of such Conversion Privilege by such holder of Class B Preferred. Such approval shall not be unreasonably withheld. Upon receipt of the Notice of Conversion and the board’s approval of such conversion, the Corporation shall give a Notice of Approval to the holder within 48 hours of the receipt of the Notice of Conversion that the exercise of the Conversion Privilege by such holder is approved.
(3) The Conversion Privilege may be exercised in whole or in part and, if exercised in part, a certificate(s) will be issued for the remaining Class B Preferred in any case in which fewer than all of the Class B Preferred represented by a certificate(s) are converted to the same record holder of Class B Preferred converted.
(4) Each conversion will be deemed to have been effective immediately prior to the close of business on the date on which the Class B Preferred will have been so surrendered (the “Conversion Date”) and the person(s) in whose name(s) any certificate(s) for Torvec Common or Iso-Torque Common will be issuable upon the conversion will be deemed to have become the holder(s) of record of the Torvec Common or Iso-Torque Common on the Conversion Date. Effective as of the Conversion Date, the Corporation will have no obligation to pay dividends on the Class B Preferred converted provided that effective as of the Conversion Date, the Corporation shall pay all accumulated and unpaid dividends (including the prorated dividend from the last Dividend Accrual Date) on the Class B Preferred converted, payable in the discretion of the board, in cash out of any funds legally available for payment of such dividends or in shares of Class B Preferred.
(5) The Conversion Privilege shall terminate with respect to Class B Preferred called for redemption by the mailing of a Redemption Notice on the close of business on the date immediately preceding the Redemption Date.
(6) Notwithstanding the requirement for board approval and the 1 year limit set forth in Section G(2), in case of any consolidation or merger to which the Corporation is a party other than a merger or consolidation in which the Corporation is the surviving corporation or in case of any sale or conveyance to another corporation of all or substantially all of the assets of the Corporation or in the case of any statutory exchange of securities representing an excess of 50% of the total outstanding securities of the Corporation with another corporation (including any exchange effected in connection with a merger of a third corporation into the Corporation), the holders of Class B Preferred then outstanding will have the right to convert the Class B Preferred into the kind and amount of securities, cash or other property which the holder would have owned or have been entitled to receive immediately after the consolidation, merger, statutory exchange, sale or conveyance, had the Class B Preferred been converted immediately prior to the effective date of the consolidation, merger, statutory exchange, sale or conveyance as the case may be.
(7) Notwithstanding the 1 year holding period set forth in Section G(2), in the event the highest bid price for the Corporation’s $.01 par value common stock quoted on any exchange, automated quotation system or the OTC Bulletin Board on which such stock is actively traded is $20 or more on 5 consecutive trading days, the holders of Class B Preferred shall have the right to convert such Class B Preferred upon board approval for such conversion period.
(8) Torvec Common or Iso-Torque Common delivered upon conversion of Class B Preferred will be, upon delivery, validly issued, fully paid and nonassessable, free of all liens and charges and not subject to any preemptive rights.
(9) In case the Corporation
(a) declares a dividend, or makes a distribution, on shares of its $.01 par value common stock in shares of its $.01 par value common stock; or
(b) subdivides its outstanding shares of its $.01 par value common stock into a greater number of shares of its $.01 par value common stock; or
(c) combines its outstanding shares of its $.01 par value common stock into a smaller number of shares of $.01 par value common stock, the number of Torvec Common issuable upon the conversion of the Class B Preferred shall be adjusted at the time of the record date for the dividend or distribution or the effective date of the subdivision or a combination so that after such record or effective date, each holder of Class B Preferred will be entitled to receive the same percentage of ownership of the Corporation’s $.01 par value common stock as such holder would have been entitled to receive immediately prior to such record or effective date.
During the years ending December 31, 2006 and 2004, the company sold 55,000 and 42,500 Class B Preferred in a number of private placements for proceeds of approximately $275,000 and $212,500, respectively. No Class B Preferred was sold during the years ending December 31, 2007 and 2008.
At December 31, 2008, Class B Preferred dividends in arrears amounted to approximately $147,000.
(g) Reports to Shareholders
The company furnishes its shareholders with an annual report containing audited financial statements and such other periodic reports as the company may determine to be appropriate or as may be required by law. The company complies with periodic reporting, proxy solicitation and certain other requirements of the Securities Exchange Act of 1934.
(h) Transfer Agent and Registrar
Continental Stock Transfer & Trust Company has been appointed as the company’s Transfer Agent and Registrar for its common stock and for its preferred stock.
Item 6.
Item 6.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(a) Overall Business Strategy
From its inception in 1996, the company’s overall business plan has been to design, develop, build and commercialize its FTV® worldwide, especially in the Asian, African, South and Central American and Eastern European markets. In addressing issues and solving problems encountered in the design and development of the FTV, the company designed and developed a number of automotive drive-line technologies-i.e. the company’s hydraulic pump/motor system, infinitely variable transmissions, Iso-Torque® differential and constant velocity joint technology.
The FTV® has been developed and is ready for commercialization. In addition, each of the company’s other automotive technologies has been developed and are ready for commercialization - either independently on a stand-alone basis or as incorporated into the company’s FTV.
In present circumstances, the company intends to produce, market and distribute FTV’s by entering into a joint venture relationship with an automotive manufacturer. The company intends to incorporate its drive-line technologies into the FTV to enhance its marketability and value. The company also intends to license and/or enter into supply contracts with automotive manufacturers, military contractors, tier-one suppliers and possibly end-users for its drive-line technologies independent of their utilization in the FTV.
(b) Current Status of Business Plan and Ongoing Projects
The company’s plan of operation during the year ending December 31, 2009 is as follows:
1) to continue working with the U.S. Air Force to create an Advanced Combat Firefighting Vehicle capable of unprecedented speed, maneuverability with diverse applications for use in the most extreme and rugged terrain. The company has delivered an FTV® to the Air Force to maximize the FTVs combat firefighting capabilities, including its robotic and autonomous potential, at Tyndale Air Force Base in Florida;
2) to build a “second generation” FTV based upon the Air Force’s recommendations for delivery to the Air Force for integration in its Advanced Combat Firefighting Vehicle Program;
3) to explore interest in the FTV among other branches of the U.S. military, the Department of Homeland Security, FEMA, the U.S. Forestry Service, as well as state and municipal governmental units, will purchase design-specific FTVs for boarder patrol, off-highway emergencies, as an environmentally-friendly vehicle for federal and state conservation and drug-enforcement efforts and ,as a fast, highly maneuverable vehicle for combat and non-combat uses;
4) to explore the interest of a foreign truck manufacturer in licensing the rights to produce and market the FTV worldwide;
5) to complete and ship approximately seven design-specific infinitely variable transmissions to the National Aeronautics and Space Administration for use in that agency’s lunar rover in connection with NASA’s program titled “America’s return to the moon;” to continue to work with NASA as an “official” drive-line consultant to the lunar rover project;
6) to build an IsoTorque® differential for evaluation by a major American automotive manufacturer for integration in its front-wheel drive vehicles. Previously, in 2008, the manufacturer had evaluated the IsoTorque differential in its rear-wheel drive vehicles;
7) to create an active differential control device for a domestic manufacturer of axles for medium-duty trucks and heavy-duty trucks;
8) to redesign the axle used by a major international truck manufacturer to enable the manufacturer to integrate the company’s IsoTorque technology in its fleet of heavy-duty trucks.
Information regarding the company and all of its automotive inventions, including regular updates on technological and business developments, can be found on the company’s website, www.torvec.com.
Through June 14, 2007, the company held a license to ice technology granted by the Trustees of Dartmouth College. This license was held through the company’s majority-owned subsidiary, Ice Surface Development, Inc. The license required the company to pay Dartmouth College a royalty of 3.5% of the net sales of licensed product with minimum annual payments of $25,000 through 2021. In addition, the license provided for the payment of 50% of sub-license fee income.
Since its acquisition of the ice technology license, the company worked with the technology’s inventor, Dr. Victor Petrenko at Dartmouth’s Thayer School of Engineering, to refine the various methods of deicing and used its best efforts to sublicense such technology to one or more domestic and/or foreign glass manufacturers, automotive companies and other potential end-users. A considerable amount of additional development work was performed at the Dartmouth College’s Center for Ice Technology on the college’s campus, which work was supervised by Dr. Petrenko.
In December, 2006, the company was informed by Dr. Petrenko that while the physics underlying the ice technology is still valid and the technology remains promising, he could not estimate a time frame when the technology would be mature enough for automotive commercialization.
Given Dr. Petrenko’s assessment with respect to the ice technology, management concluded that the carrying amount of the ice technology license as of December 31, 2006 ($1,071,000) exceeded the estimated cash flows the company reasonably expected to receive and, therefore, determined the full amount of such excess should be recorded as an impairment in accordance with SFAS No. 144 as of and for the year ended December 31, 2006.
During 2007, the company and Dr. Petrenko discussed the terms and conditions under which the company would accept Dr. Petrenko’s offer to purchase the license from the company. Effective June 15, 2007, the company assigned all of its rights, title and interest in and to the license to Dr. Petrenko’s company (Ice Engineering, LLC) in exchange for an agreement by Ice Engineering to pay the shareholders of Ice Surface Development a royalty equal to 5% of the gross revenues generated by the license and the assumption of the company’s obligations to Dartmouth College under the license.
Separately, Ice Engineering, LLC agreed to reimburse approximately $3,500,000 of acquisition and maintenance costs expended by the company in connection with the ice technology. Pursuant to the reimbursement agreement, the company received $500,000 on June 15, 2007. Under the license assignment agreement, the $3,000,000 balance is to be paid at the rate of $300,000 per quarter commencing March 1, 2008, less approximately $91,000 in fees payable to Dartmouth College accrued through June 14, 2007 to be deducted from the first quarterly reimbursement amount.
On October 31, 2008, the company commenced an action in New York State Supreme Court, County of New York, Commercial Division against Ice Engineering, LLC seeking the total balance owed by Ice Engineering to the company pursuant to an agreement entered into by the parties, effective June 15, 2007, namely, $2,700,000. Under the agreement, in connection with Torvec’s assignment of the ice technology license, Ice Engineering agreed to reimburse Torvec for approximately $3,500,000 the company previously had expended acquiring and maintaining the license. Ice Engineering has paid approximately $800,000 but is in arrears with respect to installments due June 1, 2008, September 1, 2008 and December 1, 2008 and apparently has repudiated its remaining payment obligations under the agreement. Ice Engineering has counterclaimed for the $800,000 paid under the agreement thus far, alleging that the company failed to deliver certain “business information” to Ice Engineering as called for under the agreement.
The company has accounted for the receipt of reimbursement proceeds as a recovery of its cost since such amounts represent an initial payment and is subject to additional installments and when payments received exceed the cost accumulated revenue will be recorded under the cost recovery approach to the extent that the proceeds exceed the basis.
(c) Company Expenses
The net loss for the year ended December 31, 2008 was $1,683,000 as compared to the year ended December 31, 2007 net loss of $3,211,000. The decrease in the net loss of $1,528,000 is principally related to the gain on a settlement of debt of $1,541,000 and the receipts of state tax credits of $281,000.
Research and development expenses for the year ended December 31, 2008 amounted to $535,000 as compared to $710,000 for the year ended December 31, 2007. This decrease of $175,000 is principally attributable to decreased costs associated with developing our technologies. The company is strategically positioning itself towards production and manufacturing and this new focus will require less research and development cost.
General and administrative expenses for the year ended December 31, 2008 amounted to $3,165,000 as compared to $2,653,000 for the year ended December 31, 2007. This increase amounted to $512,000 and is principally due to the increase of $300,000 in stock based compensation from the prior year. The company made some significant reductions in the consultant expenses due to several changes in the structure of the equity compensation. This decrease in expense is primarily a non cash event due to the high percentage of consultant cost being met through the issuance of business consulting shares of common stock.
(d) Liquidity and Capital Resources
The company’s business activities during its fiscal year ended December 31, 2008 were funded principally through:
During the fiscal year ended December 31, 2008 and 2007, the company issued 1,000,348 and 359,432 common shares to business consultants under its business consultants stock plan in exchange for ongoing corporate legal services, internal accounting services, business advisory services as well as legal fees and associated expenses for ongoing patent work and litigation. As of December 31, 2008 and 2007 there are 3,653,278 and 4,653,626 shares available for future issuances under the plan.
During the years ended December 31, 2004 through and including December 31, 2007, James and Keith Gleasman had a working arrangement with the company pursuant to which, on a noncompensated basis, each of them would provide consulting services and assign new patents, existing patent improvements and all know-how in connection with all their inventions to the company. In addition, Keith Gleasman agreed to serve as president and James Gleasman agreed to serve as chief executive officer and interim chief financial officer.
On March 28, 2008 the board of directors approved the governance and compensation committee’s recommendation that, effective January 1, 2008, each of the Gleasmans be compensated at the rate of $300,000 per year. Such amount is payable in cash. No payment of all or any portion of the Gleasmans’ compensation shall be paid unless and until the company shall have the requisite cash available. The determination of the availability of the requisite amount of cash shall be made by the board of directors in the light of approved-budgets, existing and anticipated capital requirements and existing and estimated cash flows. Unpaid amounts are accumulated and carry over from one year to the next. No amount was paid to either of the Gleasmans under this compensation arrangement during the year ended December 31, 2008. The amount of unpaid compensation accrued as of December 31, 2008 is $622,000 including accrued payroll taxes.
The company’s financial statements have been prepared assuming that it will continue as a going concern. For the period from September 1996 (inception) through December 31, 2008, the company has accumulated a deficit of $49,941,000, and at December 31, 2008 has a working capital deficit of $541,000 and stockholders’ capital deficit of $1,120,000. The company has been dependent upon equity financing and advances from stockholders to meet its obligations and sustain operations. Management believes that based upon its current cash position, its budget for its business operations, collectability of its receivables in the ordinary course of business, the company will not be able to meet its anticipated cash requirements through December 31, 2009.
At December 31, 2008 and 2007, the company had accounts payable and accrued expenses of $932,000 and $1,965,000.
The company was a joint venture partner of Variable Gear, LLC through June 6, 2007. Under the operating agreement of Variable LLC, the company was required to purchase the 51% membership interest it did not own in such entity by January 1, 2007. Since inception, Variable Gear, LLC generated no revenues, incurred no expenses and had no operations. On June 3, 2007, the company and the 51% owner agreed that his membership would be purchased in exchange for 5,000 common shares of the company, valued at the close of trading on such date at $19,250 ($3.85 per share). Such purchase was closed on June 6, 2007.
Since there are no operations of the Variable Gear entity since inception, the company has concluded there is no future benefit to the purchased interest and has impaired the goodwill and recorded a charge of $19,000 at June 30, 2007.
(e) Critical Accounting Policies
Revenue Recognition
The company’s terms provided that customers are obligated to pay for products sold to them within a specified number of days from the date that title to the products is transferred to the customer. The company’s standard terms are typically net 30 days. The company recognizes revenue when transfer of title occurs and risk of ownership passes to a customer at the time of shipment or delivery, depending on the terms of the agreement with a particular customer. The sale price of the company’s products is substantially fixed or determinable at the date of the sale based upon purchase orders generated by a customer and accepted by the company. To the extent that collectibility of the receivable is not assured, the company follows the cost recovery approach. Accordingly, amounts collected will be accounted for as a reduction of costs.
Impairment of Long-Lived Assets
The company has adopted SFAS No. 144, “Accounting for the Impairment of Disposal of Long-Lived Assets.” Accordingly, whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable, management assesses the recoverability of the assets. Management is also required to evaluate the useful lives each reporting period. When events or circumstances indicate, our long-lived assets, including intangible assets with finite useful lives, are tested for impairment by using the estimated future cash flows directly associated with, and that are expected to arise as a direct result of, the use of the assets. If the carrying amount exceeds the estimated undiscounted cash flows, an impairment may be indicated. The carrying amount is then compared to the estimated discounted cash flows, and if there is an excess, such amount is recorded as an impairment.
In June 2006, the Financial Accounting Standards Board (“FASB”) has issued interpretation No. 48, “Accounting for Uncertainty in Income Taxes-An Interpretation of FASB Statement No. 109” (“FIN 48”), regarding accounting for, and disclosure of, uncertain tax positions. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. We adopted FIN 48 effective January 1, 2007. The adoption of FIN 48 did not have a material effect on the results of operations and financial position.
Recently Issued Accounting Principles
Effective January 1, 2008, the company adopted SFAS No. 157, “Fair Value Measurements” (“SFAS157”), which defines fair value, establishes a framework for measuring fair value and requires additional disclosures about fair value measurements. In February 2008, the FASB delayed the effective date of SFAS 157 for one year for all nonfinancial assets and nonfinancial liabilities, except for those items that are recognized or disclosed at fair value in the financial statements on a recurring basis. Management has determined that the adoption of SFAS 157 did not have a material effect on the company’s consolidated financial statements.
Effective January 1, 2008 the company adopted SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities - including an amendment of FASB Statement 115” (“SFAS 159”). This statement provides companies with an option to report selected financial assets and liabilities at fair value. As of December 31, 2008, the company has not elected to use the fair value option allowed by SFAS 159. Management has determined that the adoption of SFAS 159 did not have a material effect on the company’s consolidated financial position, results of operations, cash flows or financial statement disclosures.
In December 2007, the FASB issued Statement No. 141 (revised), “Business Combinations” (“SFAS 141 (R)”). The standard changes the accounting for business combinations including the measurement of acquirer shares issued in consideration for a business combination, the recognition of contingent consideration, the accounting for pre-acquisition gain and loss contingencies, the recognition of capitalized in-process research and development , the accounting for acquisition-related restructuring cost accruals, the treatment of acquisition related transaction costs and the recognition of changes in the acquirer’s income tax valuation allowance. SFAS 141(R) is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008, with early adoption prohibited. As such, the company is required to adopt these provisions at the beginning of the fiscal year ending December 31, 2009. SFAS 141(R) will be applied prospectively for acquisitions beginning in 2009 or thereafter.
In March 2008, the Financial Accounting Standards Boards (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 161, Disclosures about Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133”. SFAS 161 requires enhanced disclosures about an entity’s derivative and hedging activities. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008 with early application encouraged. As such, the Company is required to adopt these provisions at the beginning of the fiscal year ended December 31, 2009. The Company has determined that SFAS 161 is not applicable and will have no effect to its consolidated financial statements.
In May 2008, the FASB issued Statement of Financial Accounting Standards No. 162 (SFAS 162), “The Hierarchy of Generally Accepted Accounting Principles.” SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with U.S. GAAP. SFAS 162 became effective in September 2008 following the approval by the SEC. The company currently adheres to the hierarchy of US GAAP and adoption did not have a material effect on its consolidated financial statements.
In 2008, the FASB issued EITF 07-05, Determining whether an Instrument (of Embedded Feature) Is Indexed to an Entity’s Own Stock, (“EITF 07-05”). EITF 07-05 provides guidance on determining what types of instruments or embedded features in an instrument held by a reporting entity can be considered indexed to its own stock for the purpose of evaluating the first criteria of the scope exception in paragraph 11(a) of SFAS 133. EITF 07-05 is effective for financial statements issued for fiscal years beginning after December 15, 2008 and early application is not permitted. Management believes the adoption of EITF 07-05 in fiscal 2009 will not have any impact on the company.
(f) Impact of Inflation
Inflation has not had a significant impact on the company’s operations to date and management is currently unable to determine the extent inflation may impact the company’s operations during its fiscal year ending December 31, 2008.
(g) Quarterly Fluctuations
As of December 31, 2008 and 2007, the company had not engaged in substantial revenue producing operations. Once the company actually commences significant revenue producing operations, the company’s operating results may fluctuate significantly from period to period as a result of a variety of factors, including purchasing patterns of consumers, the length of the company’s sales cycle to key customers and distributors, the timing of the introduction of new products and product enhancements by the company and its competitors, technological factors, variations in sales by product and distribution channel, product returns, and competitive pricing. Consequently, once the company actually commences significant revenue producing operations, the company’s product revenues may vary significantly by quarter and the company’s operating results may experience significant fluctuations.
TORVEC, INC. AND SUBSIDIARIES
(a development stage company)
Contents
Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Torvec, Inc.
We have audited the accompanying consolidated balance sheets of Torvec, Inc. (a development stage company) and its subsidiaries as of December 31, 2008 and 2007, and the related consolidated statements of operations and cash flows for each of the years in the two-year period ended December 31, 2008 and for the period from September 25, 1996 (inception) through December 31, 2008 and changes in stockholders’ equity (capital deficit) for each of the periods from September 25, 1996 (inception) through December 31, 2008. 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. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits include consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in 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 provides a reasonable basis for our opinion.
In our opinion, the financial statements enumerated above present fairly, in all material respects, the consolidated financial position of Torvec, Inc. and subsidiaries as of December 31, 2008 and 2007, and the consolidated results of their operations and their consolidated cash flows for each of the years in the two-year period ended December 31, 2008 and for the period from September 25, 1996 (inception) through December 31, 2008, in conformity with accounting principles generally accepted in the United States.
The accompanying consolidated financial statements have been prepared assuming that the company will continue as a going concern. As discussed in Note A to the consolidated financial statements, the Company has incurred recurring losses from operations, has limited revenues and has negative working capital and capital deficits at December 31, 2008. These factors raise substantial doubt about the Company's ability to continue as a going concern. Management’s plans in regard to these matters are also discussed in Note A. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ EISNER LLP
New York, New York
March 31, 2009
TORVEC, INC. AND SUBSIDIARIES
(a development stage company)
Consolidated Balance Sheets
December 31, 2008 and 2007
See notes to consolidated financial statements
TORVEC, INC. AND SUBSIDIARIES
(a development stage company)
Consolidated Statements of Operations
See notes to consolidated financial statements
TORVEC, INC. AND SUBSIDIARIES
(a development stage company)
Consolidated Statements of Changes in Stockholders’ Equity (Capital Deficit)
For the Period from September 25, 1996 (Inception) through December 31, 2008
See notes to consolidated financial statements
TORVEC, INC. AND SUBSIDIARIES
(a development stage company)
Consolidated Statements of Changes in Stockholders’ Equity (Capital Deficit)
For the Period from September 25, 1996 (Inception) through December 31, 2008
(continued)
See notes to consolidated financial statements
TORVEC, INC. AND SUBSIDIARIES
(a development stage company)
Consolidated Statements of Changes in Stockholders’ Equity (Capital Deficit)
For the Period from September 25, 1996 (Inception) through December 31, 2008
(continued)
See notes to consolidated financial statements
TORVEC, INC. AND SUBSIDIARIES
(a development stage company)
Consolidated Statements of Changes in Stockholders’ Equity (Capital Deficit)
For the Period from September 25, 1996 (Inception) through December 31, 2008
(continued)
See notes to consolidated financial statements
TORVEC, INC. AND SUBSIDIARIES
(a development stage company)
Consolidated Statements of Changes in Stockholders’ Equity (Capital Deficit)
For the Period from September 25, 1996 (Inception) through December 31, 2008
(continued)
See notes to consolidated financial statements
TORVEC, INC. AND SUBSIDIARIES
(a development stage company)
Consolidated Statements of Changes in Stockholders’ Equity (Capital Deficit)
For the Period from September 25, 1996 (Inception) through December 31, 2008
(continued)
See notes to consolidated financial statements
TORVEC, INC. AND SUBSIDIARIES
(a development stage company)
Consolidated Statements of Changes in Stockholders’ Equity (Capital Deficit)
For the Period from September 25, 1996 (Inception) through December 31, 2008
(continued)
See notes to consolidated financial statements
See notes to consolidated financial statements
TORVEC, INC. AND SUBSIDIARIES
(a development stage company)
Consolidated Statements of Cash Flows
See notes to consolidated financial statements
TORVEC, INC. AND SUBSIDIARIES
(a development stage company)
Notes to Consolidated Financial Statements
December 31, 2008
Note A - The Company and Basis of Presentation
Torvec, Inc. (the “company”) was incorporated as a New York State business corporation in September 1996. The company, which is in the development stage, has developed technology for use in automotive applications. In September, 1996, the company acquired numerous patents, inventions and know-how (the “technology”) contributed by Vernon E. Gleasman, James Y. Gleasman and Keith E. Gleasman (the“Gleasmans”). The company has developed, designed and intends to commercialize its infinitely variable transmissions, its pumps/motors, its IsoTorque® differential, its constant velocity joint and the substructure and components of its full terrain vehicle. As consideration for this contributed technology, the company issued 16,474,400 shares of common stock and paid $365,000 to the Gleasmans. In September, 1996, the company issued an additional 2,535,000 shares of common stock (valued at $406,000) to individuals as consideration for the cost of services and facilities provided by them in assisting with the development of the technology.
On November 29, 2000, the company acquired Ice Surface Development, Inc. (“Ice”) which had been incorporated in May 2000 for 1,068,354 shares of common stock valued at approximately $3,405,000. The acquisition was accounted for under the purchase method. On March 31, 2002, the company granted to three former officers of the company 28% of Ice in exchange for previously granted fully vested options. The exchange was valued at $618,000 and the carrying portion of the company’s investment deemed sold of $850,000 is reflected as a reduction of additional paid-in capital in capital deficit.
Effective June 15, 2007, Ice assigned the license to an unrelated company, Ice Engineering, LLC, in exchange for Ice Engineering’s agreement to pay the shareholders of Ice Surface Development an annual royalty equal to 5% of the annual gross revenues generated by the license and its agreement to assume the obligations to Dartmouth College under the license. See Note B [5].
The company’s financial statements have been prepared assuming that it will continue as a going concern. For the period from September 1996 (inception) through December 31, 2008, the company has accumulated a deficit of $49,941,000, and at December 31, 2008 has a working capital deficit of $541,000 and stockholders’ capital deficit of $1,120,000. The company has been dependent upon equity financing and advances from stockholders to meet its obligations and sustain operations. The company’s efforts have been principally devoted to the development of its technologies and commercializing its products. Management believes that based upon its current cash position, its budget for its business operations through December 31, 2009, collectability of its receivables in the ordinary course of business, the company will not be able to meet its anticipated cash requirements through December 31, 2009.
The company is actively seeking additional sources of capital. There can be no assurance that the company can successfully implement its business plan or raise sufficient capital on acceptable terms. Without sufficient additional capital or long term debt and ultimately profitable operating results the company will not be able to continue as a going concern. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amounts and classification of liabilities that may result from the outcome of this uncertainty.
Note B - Summary of Significant Accounting Policies
[1]
Consolidation:
The financial statements include the accounts of the company, its majority-owned subsidiary, Ice Surface Development, Inc. (56 % and 69.26% owned at December 31, 2008 and 2007, respectively), and its wholly-owned subsidiaries Iso-Torque Corporation, IVT Diesel Corp. and Variable Gear LLC. All material intercompany transactions and account balances have been eliminated in consolidation.
[2]
Cash and Cash Equivalents
Cash and cash equivalents include time deposits, certificates of deposit, and all highly liquid debt instruments with original maturities of three months or less. The company maintains cash and cash equivalents at financial institutions which periodically may exceed federally insured amounts.
[3]
Property and Equipment:
Equipment, including a prototype vehicle, is stated at cost less accumulated depreciation. Depreciation is provided using the straight-line method over the estimated useful lives of the assets which range from three to seven years. Leasehold improvements are being amortized over shorter of lease term or useful life.
[4]
Research and Development and Patents:
Research and development costs and patent expenses are charged to operations as incurred. Research and development includes amortization of the Ice technology, purchase of parts, depreciation and consulting services. Depreciation expense in each of the years ended December 31, 2008 and 2007 that was charged to research and development was $67,000 and $47,000 respectively.
Patent costs for the year ended December 31, 2008 and 2007 are $114,000 and $43,000, respectively.
[5]
License:
The company follows SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” Whenever events or circumstances indicate, the company’s long-lived assets, including intangible assets with finite useful lives, are tested for impairment by using the estimated future cash flows directly associated with, and that are expected to arise as a direct result of, the use of the assets. If the carrying amount exceeds the estimated undiscounted cash flows, an impairment may be indicated. The carrying amount is then compared to the estimated discounted cash flows, and if there is an excess, such amount is recorded as an impairment.
In accordance with SFAS No. 144, management determined that events and circumstances indicated that the carrying amount of the license for the company’s Ice technology exceeded the estimated undiscounted cash flows to be generated by the license. Based upon such determination, management compared the carrying amount of the license as of December 31, 2006 to the estimated discounted cash flows to be generated by the license and recorded such excess as an impairment. Management has concluded that the carrying amount of its Dartmouth College license as of December 31, 2006 ($1,071,000) was impaired in accordance with SFAS No. 144. (See Note C.)
Effective June 15, 2007, the company assigned the license to Ice Engineering, LLC in exchange for Ice Engineering’s agreement to pay the shareholders of the company’s majority-owned subsidiary, Ice Surface Development, Inc., an annual royalty equal to 5% of the annual gross revenues generated by the license and its agreement to assume all of the obligations to Dartmouth College under the license. See Note C.
[6]
Use of Estimates:
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Such estimates are used in valuing the useful lives of its intangible assets and the future realizable value of such assets. These estimates are subject to a high degree of judgment and potential change. Actual results could differ from those estimates.
[7]
Loss per Common Share:
Statement of Financial Accounting Standards (“SFAS”) No. 128, “Earnings Per Share,” requires the presentation of basic earnings per share, which is based on common stock outstanding, and dilutive earnings per share, which gives effect to options, warrants and convertible securities in periods when they are dilutive. At December 31, 2008, and 2007, the company excluded 3,098,899 and 3,540,739 potential common shares, respectively, relating to convertible preferred stock outstanding, options and warrants from its diluted net loss per common share calculation because they are anti-dilative.
[8]
Fair Value of Financial Instruments:
The carrying amount of cash, prepaid expenses, accounts payable, and accrued expenses approximates their fair value due to the short maturity of those instruments.
[9]
Stock-based Compensation:
The Stock Options Plan was terminated as of May 27, 2008 as to the grant of additional options. 641,848 previously issued and outstanding options remain exercisable in accordance with the terms of the options.
Effective January 1, 2006, we adopted Statement of Financial Accounting Standards (“SFAS”) No. 123(R), “Share Based Payment.” We elected to use the modified prospective transition method; therefore, prior period results were not restated. Prior to the adoption of SFAS 123(R), stock-based compensation expense related to stock options was not recognized in the results of operations if the exercise price was at least equal to the market value of the common stock on the grant date, in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”.
SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized as compensation expense over the service period (generally the vesting period) in the consolidated financial statements based on their fair values. Under the modified prospective method, awards that were granted, modified, or settled on or after January 1, 2006 are measured and accounted for in accordance with SFAS 123(R). Unvested equity-classified awards that were granted prior to January 1, 2006 will continue to be accounted for in accordance with SFAS 123, except that the grant date fair value of all awards are recognized in the results of operations over the remaining vesting periods. The impact of forfeitures that may occur prior to vesting is also estimated and considered in the amount recognized. In addition, the realization of tax benefits in excess of amounts recognized for financial reporting purposes will be recognized as a financing activity in accordance with SFAS 123(R).
No tax benefits were attributed to the stock-based compensation expense because a valuation allowance was maintained for substantially all net deferred tax assets. We elected to adopt the alternative method of calculating the historical pool of windfall tax benefits as permitted by FASB Staff Position (FSP) No. SFAS 123(R)-c, “Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards.” This is a simplified method to determine the pool of windfall tax benefits that is used in determining the tax effects of stock compensation in the results of operations and cash flow reporting for awards that were outstanding as of the adoption of SFAS 123(R).
[10]
Revenue Recognition:
The company’s terms provided that customers are obligated to pay for products sold to them within a specified number of days from the date that title to the products is transferred to the customers. The company’s standard terms are typically net 30 days. The company recognizes revenue when transfer of title occurs and risk of ownership passes to a customer at the time of shipment or delivery depending on the terms of the agreement with a particular customer. The sale price of the company’s products is substantially fixed and determinable at the date of the sale based upon purchase orders generated by a customer and accepted by the company.
[11]
Recent Accounting Pronouncements:
Effective January 1, 2008, the company adopted SFAS No. 157, “Fair Value Measurements” (“SFAS157”), which defines fair value, establishes a framework for measuring fair value and requires additional disclosures about fair value measurements. In February 2008, the FASB delayed the effective date of SFAS 157 for one year for all nonfinancial assets and nonfinancial liabilities, except for those items that are recognized or disclosed at fair value in the financial statements on a recurring basis. Management has determined that the adoption of SFAS 157 did not have a material effect on the company’s consolidated financial statements.
Effective January 1, 2008 the company adopted SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities - including an amendment of FASB Statement 115” (“SFAS 159”). This statement provides companies with an option to report selected financial assets and liabilities at fair value. As of December 31, 2008, the company has not elected to use the fair value option allowed by SFAS 159. Management has determined that the adoption of SFAS 159 did not have a material effect on the company’s consolidated financial position, results of operations, cash flows or financial statement disclosures.
In December 2007, the FASB issued Statement No. 141 (revised), “Business Combinations” (“SFAS 141 (R)”). The standard changes the accounting for business combinations including the measurement of acquirer shares issued in consideration for a business combination, the recognition of contingent consideration, the accounting for pre-acquisition gain and loss contingencies, the recognition of capitalized in-process research and development , the accounting for acquisition-related restructuring cost accruals, the treatment of acquisition related transaction costs and the recognition of changes in the acquirer’s income tax valuation allowance. SFAS 141(R) is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008, with early adoption prohibited. As such, the company is required to adopt these provisions at the beginning of the fiscal year ending December 31, 2009. SFAS 141(R) will be applied prospectively for acquisitions beginning in 2009 or thereafter.
In March 2008, the Financial Accounting Standards Boards (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 161, Disclosures about Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133”. SFAS 161 requires enhanced disclosures about an entity’s derivative and hedging activities. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008 with early application encouraged. As such, the Company is required to adopt these provisions at the beginning of the fiscal year ending December 31, 2009. In review of SFAS 161, the Company has determined that it is not applicable and will have no effect to its consolidated financial statements.
In May 2008, the FASB issued Statement of Financial Accounting Standards No. 162 (SFAS 162), “The Hierarchy of Generally Accepted Accounting Principles.” SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with U.S. GAAP. SFAS 162 became effective in September 2008 following the approval by the SEC. The Company adheres to the hierarchy of US GAAP as present in SFAS 162 and adoptions did not have a material effect.
In 2008, the FASB issued EITF 07-05, Determining whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock, (“EITF 07-05”). EITF 07-05 provides guidance on determining what types of instruments or embedded features in an instrument held by a reporting entity can be considered indexed to its own stock for the purpose of evaluating the first criteria of the scope exception in paragraph 11(a) of SFAS 133. EITF 07-05 is effective for financial statements issued for fiscal years beginning after December 15, 2008 and early application is not permitted. Management believes the adoption of EITF 07-05 in fiscal 2009 will not have any impact on the Company.
NOTE C - LICENSE FROM THE TRUSTEES OF DARTMOUTH COLLEGE
On November 28, 2000, the company’s majority-owned subsidiary, Ice Surface Development LLC entered into a 20-year exclusive license with the Trustees of Dartmouth College for land-based applications to a novel ice adhesion modification system developed by Dr. Victor Petrenko at Dartmouth’s Thayer School of Engineering. Under the license agreement the company made a single payment of $140,000 in 2000 for sponsored research. The license agreement provided for a royalty of 3.5% based on the value of net sales of licensed product with minimum annual payments of $10,000 for the first two years, $15,000 for the third year and $25,000 per year through 2021. In addition, the agreement provided for the payment of 50% of sub-license fee income.
Expense relating to the license agreement totaled $160,000 for the fiscal years 2005 through 2007. While in management’s opinion, the carrying value of the license had been impaired as of and for the year ended December 31, 2006, the company’s obligations under the license remained in effect.
Effective June 15, 2007, Ice Surface assigned the license to an unrelated company, Ice Engineering, LLC in exchange for Ice Engineering’s agreement to pay the shareholders of Ice Surface an annual royalty equal to 5% of the annual gross revenues generated by the license and its agreement to assume the obligations to Dartmouth under the license.
Separately, Ice Engineering, LLC agreed to reimburse approximately $3,500,000 of acquisition and maintenance costs expended by the company in connection with the ice technology. Pursuant to the reimbursement agreement, the company received $500,000 on June 15, 2007. Under the license assignment agreement, the $3,000,000 balance is to be paid at the rate of $300,000 per quarter commencing March 1, 2008, less approximately $91,000 in fees payable to Dartmouth College accrued through June 14, 2007 to be deducted from the first quarterly reimbursement amount. The company received the first installment of $209,000 due March 1, 2008 on April 3, 2008 and did not receive the installments due June 1, 2008 and September 1, 2008.
On October 31, 2008, the company commenced an action in New York State Supreme Court, County of New York, Commercial Division against Ice Engineering, LLC seeking the total balance owed by Ice Engineering to the company pursuant to an agreement entered into by the parties, effective June 15, 2007, namely, $2,700,000. Ice Engineering has counterclaimed for the $800,000 paid under the agreement thus far, alleging that the company failed to deliver certain “business information” to Ice Engineering as called for under the agreement.
The company has accounted for the receipt of the reimbursement proceeds as a recovery of costs since such amounts represent an initial payment and is subject to additional installments and when payments received exceed the cost accumulated, revenue will be recorded under the cost recovery approach to the extent that the proceeds exceed the basis.
NOTE D - RELATED PARTY TRANSACTIONS
NOTE E - INCOME TAXES
The company recognizes deferred tax assets and liabilities for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. The company’s majority owned subsidiary, Ice, files separate tax returns.
At December 31, 2008, the company has available $21,474,000 (including $3,743,000 relating to Ice) of net federal operating loss carry forwards to offset future taxable income expiring 2010 through 2027. Based upon the change of ownership rules under section 382 of the Internal Revenue Code of 1986, if in the future the company issues common stock or additional equity instruments convertible into common shares which result in an ownership change exceeding the 50% limitation threshold imposed by that section, all of the company’s net operating loss carry forwards may be significantly limited as to the amount of use in any particular year.
At December 31, 2008, the company has a deferred tax asset of approximately $8,435,000 representing the benefits of its net operating loss carry forward and a deferred tax asset of $10,817,000 from temporary differences, principally stock options not currently deductible and certain operating expenses which have been capitalized as start-up costs for federal income tax purposes. The total of these deferred tax assets has been fully reserved by a valuation allowance since realization of their benefit is uncertain. The valuation allowance for deferred tax assets increased $794,000 in the year ending December 31, 2008 due primarily to the uncertainty in realizing the benefit from net operating losses.
Reconciliation between the actual income tax benefit and income taxes computed by applying the federal income tax rate of 34% to the net loss is as follows:
As the result of the implementation of the Financial Accounting Standards Board (“FASB”) interpretation No. 48, “Accounting for Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109” (“FIN 48”), the company recognized no material adjustments to unrecognized tax benefits. At the adoption date of January 1, 2007, and as of December 31, 2008, the company has no unrecognized tax benefits.
The company recognizes interest and penalties related to uncertain tax positions in general and administrative expense. As of December 31, 2008, the company has not recorded any provision for accrued interest and penalties related to uncertain tax positions.
By statute, tax years 2005-2008 remain open to examination by the major taxing jurisdictions to which the company is subject.
NOTE F-ACCOUNTS PAYABLE AND ACCRUED LIABILITY EXPENSES
At December 31, 2008 and 2007, accounts payable and accrued expenses consist of the following:
NOTE G - NOTE PAYABLE
During year ended December 31, 2006, the company refinanced two vehicles and pledged the vehicles as collateral for the loan. The loan in the amount of $56,174 is paid in monthly installments of $1,201 consisting of principal and interest at 10.3% per annum through August 2011.
The following represents the required minimum payments for each of the loans:
Note H - Stockholders’ Equity (Capital Deficit)
[1]
Private Placement:
The company received net proceeds of $550,000, $1,230,000 (of which $507,000 was received from the Gleasman family), $758,000, $1,068,000 and $331,000 from private placements of its common stock for the years ended December 31, 2000, 1999, 1998 and 1997 and for the period ended December 31, 1996, respectively.
During 2002, the company sold 508,897 common shares for net proceeds of approximately $668,000.
In 2003, an existing stockholder purchased 361,112 common shares for $300,000 and was paid 70,000 common shares at market value on the date of issuance (valued at $158,000) for consulting services and rent for the company’s use of a facility and technicians. The company also sold an additional 8,000 common shares to an unrelated party for $20,000.
In 2004, the same existing stockholder purchased 60,000 common shares for $301,000 and was paid 35,000 common shares at market value on the date of issuance(valued at $194,000) as rent for use by the company of a facility and technicians.
In 2005, this stockholder was paid 90,000 common shares at market value on the date of issuance (valued at $259,000) for consulting services rendered to the company.
During 2008, the company sold 101,364 share of common stock to accredited investors for proceeds of approximately $198,000.
[2]
Class A Preferred Stock:
In January 2002, the company authorized the sale of up to 2,000,000 shares of its Class A Non-Voting Cumulative Convertible Preferred Stock (“Class A Preferred”). During 2002, the company sold 38,500 shares at $4.00 per share of its Class A Preferred in a private placement for approximately $142,000 in net proceeds. Each share of Class A Preferred is convertible into one share of voting common stock and entitles the holder to dividends, at $.40 per share per annum. The holder has the right to convert after one year subject to board approval.
In connection with this offering the company granted the placement agent 5,000 Class A Warrants, exercisable for five years at an exercise price of $1.52 per share into common stock. Such warrants were treated as a cost of the offering. Also, the placement agent was granted 10,000 warrants for providing certain financial analysis for the company. The warrants are immediately exercisable at $.30 per share for five years. The warrant contains a cashless exercise feature. The company valued the warrant at $8,000 using the Black-Scholes option-pricing model and charged operations. The company also granted to these investors 2,500 Class A Warrants, exercisable for five years at an exercise price of $0.01 per share. On July 8, August 14, September 11, 2003 and August 4, 2006, the company issued 2,500, 7,480, 1,200 and 2,500 common shares, respectively, to the placement agent upon the exercise of warrants issued in connection with this offering.
Liquidation Rights
[3]
Class B Preferred Stock:
On October 21, 2004, the company authorized the sale of up to 300,000 shares of its Class B Non-Voting Cumulative Convertible Preferred Stock (“Class B Preferred”). Each share of Class B Preferred pays cumulative dividends at $.50 per share per annum and is convertible into either one share of the company’s common stock or one share of the common stock of the company’s subsidiary, IsoTorque Corporation. The holder has the right to convert after one year, subject to board approval.
[6]
Stock-Option Plan:
In December 1997, the Board of Directors of the company approved a Stock Option Plan (the “Plan”) which provides for the granting of up to 2,000,000 shares of common stock, pursuant to which officers, directors, key employees and key consultants/advisors are eligible to receive incentive, nonstatutory or reload stock options ratified by the shareholders on May 28, 1998. Options granted under the Plan are exercisable for a period of up to 10 years from date of grant at an exercise price which is not less than the fair value on date of grant, except that the exercise period of options granted to a stockholder owning more than 10% of the outstanding capital stock may not exceed five years and their exercise price may not be less than 110% of the fair value of the common stock at date of grant. Options may vest over five years.
In 1997, in connection with certain consulting agreements (see Note D [1]), the company granted an aggregate 75,000 nonqualified options at an exercise price of $5.00 per common share. The options vested at a rate of 20% per annum and were exercisable through November 30, 2007. The company valued these options using the Black-Scholes option-pricing method. The fair value of these options was expensed over the term of the consulting agreements. The options expired on November 30, 2007 and were not replaced.
In 1998, the company granted three directors an aggregate 380,000 options under the Option Plan, all exercisable immediately at $5.00 per common share. These options expired on January 1, 2007. In 2001, the company granted 100,000 options to an officer in his capacity as a consultant under the Option Plan exercisable immediately at $5.00 per common share. In connection with this grant, the company recorded a stock compensation charge of $398,000.
In 2002, in connection with the consulting agreements described in Note D [1], the company granted an aggregate 727,047 options under the Option Plan, all exercisable immediately at $5.00 per common share. The options were granted in payment of an aggregate $653,000 owed under the consulting agreements. These options expired on September 30, 2007 and were not replaced.
In 2003, in connection with the same consulting agreements, the company granted 166,848 options under the Option Plan, all exercisable immediately at $5.00 per common share. The options were granted in payment of an aggregate $265,000 owed under the consulting agreements. These options expire on December 22, 2013.
In 2003, the company granted an aggregate 225,000 options under the Option Plan to three directors, all immediately exercisable at $5.00 per common share. These options expire on October 15, 2013.
In 2003, the company granted 50,000 options to a consultant under the Option Plan, immediately exercisable at $2.26 per common share. In connection with this grant, the company recorded a stock compensation charge of $46,000. These options expire on May 20, 2013.
In 2005, the company granted 100,000 options to a consultant under the Option Plan, immediately exercisable at $5.00 per common share. In connection with this grant, the company recorded a stock compensation charge of $247,000 allocated to research and development. These options expire on June 30, 2015.
No options were granted under the Option Plan during the year ended December 31, 2008.
A summary of options granted under the Option Plan is set forth in the following table:
The following table represents information relating to stock options outstanding at December 31, 2008:
As of December 31, 2008, the company did not have any unrecognized stock compensation related to unvested awards.
[7]
Business Consultants Stock Plan:
In June, 1999, the company adopted the Business Consultants Stock Plan (the “Stock Plan”). The Plan, as amended, provides for the issuance of up to 10,000,000 common shares to be awarded from time to time to consultants in exchange for business, financial, legal, accounting, engineering, research and development, technical, governmental relations and other similar services.
During the years ended December 31, 2008 and 2007, the company issued 112,253 and 49,772 common shares under the Business Consultants Plan to satisfy payables for services rendered as a director and recorded a charge of $250,000 and $185,000 for such years.
On April 28, 2008, the board of directors approved a one-time payment to its chairman of the governance and compensation committee of $46,000 for special services rendered in connection with required compliance under the Sarbanes-Oxley Act. This amount was paid by the issuance of 19,167 common shares under the Business Consultants Plan valued as of the closing price on April 28, 2008. The company charged $46,000 to operations in connection with such services.
[9]
Restricted Shares Issued for Services and Rent:
During 1998, the company granted 1,000 restricted common shares, valued at $3.00 per share, for services provided. During 1997, the company granted 12,000 and 2,000 restricted common shares for services provided. The company valued the shares at their fair value of $1.50 and $3.00 per share, respectively. During 2003 and 2002, 15,640 and 134,964 restricted common shares were issued for services aggregating approximately $18,000 and $198,000 respectively. During 2005 and 2004, 100,000 and 35,000 restricted common shares were issued for services and rent aggregating approximately $259,500 and $194,000. During the year ended December 31, 2007, no restricted common shares were issued. During the year ended December 31, 2008, the company issued 69,722 shares for accounting services, of which 34,861 were restricted common shares valued at approximately $52,000.
[10]
Business, Financial and Engineering Consultants:
During the year ended December 31, 2005, the company issued 210,000 warrants valued at approximately $377,000 to certain engineering consultants, immediately exercisable over a ten year term at an exercise price of $5.00 per common share. The engineering consultants holding 150,000 of these warrants agreed to cancel them in the fourth quarter of 2007 in exchange for their participation in the company’s 2007 Commercializing Event Plan. Note H [15].
In connection with its business and financial operations for the year ended December 31, 2006, the company issued 91,583 warrants valued at approximately $167,000 to a number of business and financial consultants. Such warrants are immediately exercisable at $.01 per common share, each with a ten year term. During the year ended December 31, 2006, 91,083 of these warrants were exercised for proceeds of $910 and the remaining 500 warrants were exercised during the year ended December 31, 2007 for proceeds of $5.00.
In 2006, the company issued 30,000 warrants valued at approximately $168,000 immediately exercisable over a ten year term at $5.00 per common share to certain design engineers. None of these warrants were exercised during the years ended December 31, 2008 and 2007.
The company issued 400,000 warrants valued at approximately $1,237,000 to a business consultant on August 18, 2006, immediately exercisable over a ten year term at an exercise price of $3.27 per common share. On November 21, 2006, the company issued 200,000 warrants valued at approximately $948,000 in connection with the engagement of a governmental affairs consultant, immediately exercisable over a ten year term at an exercise price of $3.75 per common share. None of these warrants were exercised during the years ended December 31, 2008 and 2007.
During the year ended December 31, 2006, the company issued 295,000 warrants to certain engineering consultants, exercisable over a ten year term at an exercise price of $5.00 per common share but only if the company were to consummate a commercializing event involving a transaction or series of transactions which results in the sale, license or other technology transfer of one or more of its technologies to a third party for value. These warrants are contingent upon an event occurring in the future and the Company will fair value these warrants when the contingency is resolved. The engineering consultants holding 295,000 of these warrants agreed to cancel them in the fourth quarter of 2007 in exchange for their participation in the company’s 2007 Commercializing Event Plan. Note H [15].
In 2007, the company issued 50,000 warrants, valued at approximately $249,000, immediately exercisable for ten years at an exercise price of $5.00 per common share upon the happening of a commercializing event. The warrants were issued to a consultant who assisted the company to potentially place its products in various state school bus programs. None of these warrants were exercised during the years ending December 31, 2008 and 2007.
In 2007, the company issued 100,000 warrants, valued at approximately $401,000, immediately exercisable for ten years at an exercise price of $5.00 per common share to engineering consultants. None of these warrants were exercised during the years ending December 31, 2008 and 2007.
In 2008, the company issued 195,000 warrants, valued at approximately $249,000, immediately exercisable for ten years at an exercise price of $5.00 per common share to engineering consultants. None of these warrants were exercised during the year December 31, 2008.
The company fair valued the warrants issued using the Black-Scholes model with the following assumptions:
On September 5, 2000, the company entered into an agreement with Swartz Private Equity,LLC (“Swartz”) pursuant to which Swartz granted the company a $50,000,000, three-year equity funding commitment. The agreement provided that, from time to time, at the company’s request, Swartz would purchase from the company that number of common shares equal to 15% of the number of shares traded in the market in the 20 business days occurring after the date of the requested purchase. The purchase price was the lesser of 91% of the average market price during that 20 day period or the average market price less $.20. As a commitment fee, the company granted Swartz a commitment warrant to purchase, in the aggregate, 960,101 common shares at a price which equaled the lowest closing price of the company common stock during the five trading days ending on each six-month anniversary of the warrant issue date.
During 2002, 76,456 commitment warrants were exercised for proceeds of approximately $60,000.
During 2003, Swartz exercised the remaining 883,645 commitment warrants in a cashless exercise transaction, receiving 647,270 common shares.
Swartz was also issued a warrant to purchase one share of the company’s common stock for every ten shares it purchased from the company under the agreement. During 2002, 47,992 of such warrants were exercised for proceeds of approximately $67,000. In 2003, Swartz exercised the balance of its purchase warrants (9,875) in a cashless exercise transaction, receiving 7,162 common shares.
The agreement with Swartz terminated on September 5, 2003.
As of December 31, 2008, outstanding warrants to acquire shares of the company’s common stock are as follows:
The following summarizes the activity of the company’s outstanding warrants for the year ended December 31, 2008:
[13]
Issuance of Stock and Warrants by Subsidiary:
In 2003, the company majority-owned subsidiary, Ice Surface Development, Inc. (“Ice”) issued 308,041 of its common stock at $.76 per share realizing aggregate proceeds of $234,000 in a private placement. These issuances reduced the company’s interest in Ice from 72% to approximately 69.26%. Based on the company’s accounting policy, the change in the company’s proportionate share of Ice’s equity resulting from the additional equity raised by the subsidiary is accounted for as a capital transaction.
In connection with the private placement, Ice issued 53,948 warrants to the placement agent immediately exercisable at $.76 per common share through June 9, 2007. In addition, 50,000 warrants were issued by Ice to a consultant immediately exercisable at $.76 per common share through June 9, 2007. In connection with the issuance of these warrants, a compensation charge of $36,000 was recognized. These warrants were cancelled effective June 7, 2007 upon the adoption by Ice’s shareholders of a Plan for the complete liquidation and dissolution of Ice.
The following table sets forth the warrants outstanding for the Ice subsidiary, exercisable in the common stock of Ice.
On September 17, 2005, certain consultants created a trust to enable them to sell business consultants shares issued to them by the company under their consultant agreements. The company issued 50,000 business consultant common shares valued at $102,000 on September 27, 2005, contingent on the performance by the consultants’ services under such consultant agreements. The company fair values the shares issued to the trust using the closing market price on the date immediately prior to the date of issuance. Amounts in excess of the consulting invoices are classified as shares issued for consulting services in stockholders’ (capital deficit) equity. No shares were sold in the trust in the year ended December 31, 2005.
During the year ended December 31, 2006, the company issued an aggregate 160,000 business consultant common shares with an aggregate value when issued of $419,000 to satisfy the payment of invoices submitted by the consultants for services rendered. During the year ended December 31, 2006, the trustee sold an aggregate 199,260 business consultant common shares for aggregate proceeds of approximately $498,990 and distributed the proceeds from the trust to the consultants in payment of invoices submitted by the consultants.
During the year ended December 31, 2007, the company issued an aggregate 132,500 business consultant common shares with an aggregate value when issued of $454,125 to satisfy the payment of invoices submitted by the consultants for services rendered. During the year ended December 31, 2007, the trustee sold 139,785 business consultants common shares for aggregate proceeds of approximately $498,069 and distributed the proceeds from the trust to the consultants in payment of invoices submitted by the consultants.
During the year ended December 31, 2008, the company issued an aggregate 373,295 business consultant common shares with an aggregate value when issued of $716,998 to satisfy the payment of invoices submitted by the consultants for services rendered. During the year ended December 31, 2008, the trustee sold 328,779 business consultants common shares for aggregate proceeds of approximately $597,119 and distributed the proceeds from the trust to the consultants in payment of invoices submitted by the consultants.
The company’s payment obligations with respect to the consultant agreements are met once it has issued shares to the trust in accordance with directives received from the consultants and the consultants, not the company, bear the risk of loss in the event the proceeds of stock sales by the trustee are less than the value of the stock contributed to the trust by the company on the date of contribution.
On October 13, 2006, the board of directors adopted a Commercializing Event Plan (2006 Event Plan”) designed to reward the company’s directors, executives and certain administrative personnel for the successful completion of one or more commercializing events. No payments were made under the 2006 Event Plan and the 2006 Event Plan was terminated on October 31, 2007.
On October 31, 2007, the board of directors terminated the Event Plan and approved a new 2007 Commercializing Event Plan (the “2007 Event Plan”), effective October 10, 2007. The 2007 Event Plan provides that upon the happening of any commercializing event, each of the directors and officers of Torvec as well as certain management personnel shall be entitled to share equally in 6% of the gross revenues derived or to be derived from the transaction and/or transactions constituting a commercializing event. Upon the happening of any commercializing event, each of the company’s engineering and security consultants shall be entitled to share equally in 2% of the gross revenues derived and/or to be derived from the transaction and/or transactions constituting a commercializing event.
In order to actually receive payment under the 2007 Event Plan, each participant must be both a) employed by, a consultant to or associated with the company and b) judged to be “in good standing” with the company at the time of any and all such payments, all as determined by the board of directors as of the date of the board’s authorization of payments to be made.
For purposes of the 2007 Event Plan, a commercializing event shall consist in any completed transaction, or series of completed transactions, regardless of form, structure or size and/or dollar amount by which the company and/or its shareholders derive gross revenue or are expected to derive gross revenue under the terms of the transaction and/or the terms of any agreement or working arrangement entered into by the company. Payments to be made to participants with respect to each given commercializing event shall be made in full upon the finalization of the commercializing event even if the company is to be paid in installments or some other type of revenue-deferred arrangement. Where payments are to be made pursuant to an arrangement, such as a license or supply contract, where the aggregate consideration to be received by the company as the result of the commercializing event is not stated, the aggregate dollar-value ascribed to the license, supply contract or similar instrument based upon an estimate of the total dollars to be received over the term of the instrument shall be utilized for purposes of fixing the gross revenues to be derived from the commercializing event.
The 2007 Event Plant specifically provides that the participants in the commercializing event plan shall be entitled to receive payments as described in the plan regardless of the number of commercializing events, in the aggregate or with respect to any given technology.
On March 28, 2008 the board of directors approved amendments to the 2007 Event Plan recommended by the governance and compensation committee to clarify that:
(a)
for purposes of the good standing requirement, all participants are considered to be in good standing unless a unanimous vote of the board of directors determines otherwise. In making this determination, the board is required to consider whether a person has engaged in conduct which has significantly harmed the company and to consider that any material violation of the company’s Code of Conduct shall constitute prima facie evidence that the company has been harmed;
(b)
participants shall be entitled to payment even though the participant is not actively engaged as a consultant to or employee of the company if the reason for not being so engaged is due to death, disability from accident, disease or similar circumstance beyond the participant’s control or is on a leave of absence approved by an authorized officer;
(c)
the plan shall terminate no earlier than October 10, 2017 but that subject to such condition, the plan may be terminated by the board of directors in its sole direction;
(d)
the benefits provided by the plan may not be reduced during its term as to amount, time, method, manner of payment and/or any other material condition;
(e)
distributions under the plan shall be made on a commercializing event by commercializing event basis.
No payments were made by the company under the 2007 Event Plan for the year ended December 31, 2007. The company issued an aggregate 9,045 common shares with a value upon issuance of $27,000 to directors, executive officers and certain administrative personnel and an aggregate 3,016 common shares with a value upon issuance of $9,000 to engineer consultants under the 2007 Event Plan for the year ended December 31, 2008 for commercializing events occurring during the year 2008.
The company accounts for the settlement of its commission arrangements to non-employee consultants, directors, executives and certain administrative personnel with the issuance of its business consulting shares under SFAS 123(R) “Share Based Payment”, provided that there are sufficient shares available under the business consulting plan. Under SFAS 123(R) the company expects to measure those transactions at the fair value of the equity instruments issued. In the event that there are insufficient shares available to settle the obligation, the company will follow the provisions of EITF 00-19 “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock”. Under EITF 00-19, the company will record a liability at the then fair value of the shares it would have issued to settle the obligation and a derivative liability instrument for the resulting changes in fair value from the date due to the end of each reporting period until such liability is satisfied.
During the year ended December 31, 2008, two engineer consultants exchanged their participation rights in the company’s 2007 Event Plan for an aggregate 195,000 warrants exercisable until 2016 at $5.00 per share upon the happening of a commercializing event. The exchange of the warrants for the participation rights in a commercialization event did not result in an accounting charge. The warrants at the date of the exchange were considered to have no value because the underlying condition for vesting the warrants was not satisfied. The company determined that the fair value of the rights to be de minimis at the date of the exchange based on management’s estimate.
Note I - Commitments and Other Matters
[1]
Consulting Agreements:
On June 30, 2005, the company entered into a non-exclusive two year consulting agreement for engineering design services. As part of the agreement, the company granted 100,000 stock options under its 1998 Stock Option Plan to acquire common shares. The option vested immediately and has a term of ten years. The exercise price for the option is $5.00 per share. The company valued the options at $247,000 using the Black-Scholes option/pricing model and charged operations. This agreement was terminated in the third quarter of 2005, although the options were not cancelled and remain outstanding for their term.
Beginning in 2005, the company entered into non-exclusive consulting agreements with various engineering consultants. Under the terms of the consulting agreements, the company will pay the amount of invoices submitted by the engineering consultants for services rendered, with such payment to be made, at the company’s discretion, in cash, business consultants stock or a combination thereof. In addition, in 2005, the company issued the engineers an aggregate 210,000 warrants exercisable immediately over a ten year term at $5.00 per common share. The company valued the warrants at $377,000 using the Black-Scholes option/pricing model and charged operations. 150,000 of these warrants were cancelled by the holders during the fourth quarter of 2007 in exchange for the holders’ participation in the company’s 2007 Commercializing Event Plan. See Note H [15].
During the year ended December 31, 2006, the company issued 295,000 warrants exercisable immediately for ten years at $5.00 per common share to various engineering consultants. The company valued the warrants at $1,441,000 using the Black-Scholes option/pricing model and charged operations. All of these warrants were cancelled by the holders during the fourth quarter of 2007 in exchange for the holders’ participation in the company’s 2007 Commercializing Event Plan. See Note H [15].
During the year ended December 31, 2006, the company issued 200,000 common stock warrants in connection with its engagement of a governmental affairs consultant. The warrants are immediately excisable over a ten year term with an exercise price of $3.75 per common share and were valued at $948,165 using the Black-Scholes pricing model.
No additional securities were issued under new and/or existing consulting agreements during the years ended December 31, 2008 and 2007 and no outstanding securities issued under these consulting agreements were exercised during the years ended December 31, 2008 and 2007.
[2]
Variable Gear, LLC:
Under the operating agreement of Variable Gear, LLC, the company was required to purchase the 51% membership interest it did not own in such entity by January 1, 2007 at the then fair market value as defined. Since inception, Variable Gear generated no revenues, incurred no expenses and had no operations. On June 3, 2007, the company and the 51% owner agreed that his entire membership interest would be purchased in exchange for 5,000 common shares of the company, valued at the close of trading on such date ($19,250 based upon a $3.85 per common share close). The transaction was finalized on June 6, 2007.
The company has recorded the purchase of the membership interest as additional goodwill. The company also recorded the deferred revenue of $150,000 as other income at June 30, 2007 because all of the company’s obligations regarding this payment have been met. Since there are no operations of the Variable Gear entity since inception, the company has concluded that there is no future benefit to the purchased interest and has impaired the goodwill and has recorded a charge of $19,000 at June 30, 2007.
During the years ended December 31, 2004 through December 31, 2006, the company leased executive office space at Powder Mills Office Park, Pittsford, New York and leased research, development and manufacturing space in Webster, New York. The company terminated its Powder Mills lease as of September 30, 2007 and its Webster lease as of December 31, 2007 in order to access additional manufacturing and assembly space and to consolidate its executive and manufacturing functions under one roof. The company was released from all further obligations under these leases.
On September 14, 2007, the company moved to a new facility located at 1999 Mount Read Blvd., Rochester, New York. The facility consists of approximately 13,650 sq. ft., with executive and engineer offices, conference room, “clean room,” manufacturing and assembly space, automotive bays, dynamometer and lift facilities and approximately thirty acres of land suitable for vehicle testing and demonstration. On April 29, 2008, the company executed a five-year lease for the premises (with a December 1, 2007 lease commencement date) providing for rent to be paid at a rate of $5,687.00 per month ($68,244.00 per annum) and in addition, for the payment of the company’s proportionate share of yearly real estate taxes and yearly common area operating costs. Under the lease, monthly rental payments commenced June 1, 2008. The lease contains three 5-year renewal options and grants an option to the company to lease up to an additional 7,000 sq. ft. of adjacent manufacturing and assembly space.
Rental payments and certain other payments due to the landlord is to be paid in common shares of the company, based upon the closing price per share on the 15th day of the calendar month immediately prior to the date any installment payment of monthly rent or other payment is due landlord.
Rent expense for the years ended December 31, 2008 and 2007 was $78,500 and $56,000 respectively.
Note J- Management Agreement
On February 20, 2004 the company entered into an agreement with a management firm to develop and implement a business plan to commercialize its full terrain vehicle. In June, 2004, the company engaged three members of the management firm as the company’s chief executive officer, chief financial officer and chairman of its board of directors. In June, 2004 and in April, 2005, the company and the management firm purported to execute agreements reflecting the company-related capacities of the management firm’s three members and reflecting the management firm’s reorganization, respectively.
No compensation was paid to the management firm by the company during the years ended December 31, 2008 and 2007. See Notes K and M describing the company’s litigation with this management firm and the settlement thereof.
Note K- Litigation
(1) On September 30, 2005, the company filed a declaratory judgment action in the Supreme Court of the State of New York for the Seventh Judicial District seeking that court’s determination that the company’s purported agreements of June, 2004 and April, 2005 with a management firm are null and void and unenforceable as against the company, its officers and directors.
On April 12, 2007, the company commenced a second lawsuit against the same management firm in the Supreme Court, Seventh Judicial District, alleging that such firm had fraudulently induced the company to enter into certain purported agreements with the management firm, did not perform the services for which the company had engaged the firm and that, as a result, the company has been damaged in excess of $6,000,000 by such firm.
As of December 31, 2008, both lawsuits were in the discovery phase. Both lawsuits have since been settled. See Note M.
(2) On October 8, 2007, the controlling persons of the company’s majority-owned subsidiary, Ice Surface Development, Inc.(“ISDI”), namely its chief executive officer, its chief operating officer and its vice-president of manufacturing, filed for arbitration of their claims that ISDI is obligated to pay them certain amounts under their employment contracts.
On October 19, 2007, the same three persons commenced a shareholders’ derivative action in the Federal District Court for the Western District of New York claiming that the company and its president breached their fiduciary duties to the minority shareholders of ISDI in assigning the Dartmouth College ice technology license for inadequate consideration.
On June 27, 2008, the Federal Court dismissed, with prejudice, the shareholders derivative action and the deadline for appealing the decision has expired.
On August 18, 2008, the plaintiffs withdrew their arbitration claim, thus ending the litigation in its entirety.
(3) On October 31, 2008, the company commenced an action in New York State Supreme Court, County of New York, Commercial Division against Ice Engineering, LLC seeking the total balance owed by Ice Engineering to the company pursuant to an agreement entered into by the parties, effective June 15, 2007, namely, $2,700,000. Under the agreement, in connection with Torvec’s assignment of the ice technology license, Ice Engineering agreed to reimburse Torvec for approximately $3,500,000 the company previously had expended acquiring and maintaining the license. Ice Engineering has paid approximately $800,000 but is in arrears with respect to installments due June 1, 2008, September 1, 2008 and December 1, 2008 and apparently has repudiated its remaining payment obligations under the agreement. Ice Engineering has counterclaimed for the $800,000 paid under the agreement thus far, alleging that the company failed to deliver certain “business information” to Ice Engineering as called for under the agreement.
Note L - Royalty Agreement
On December 12, 2007, the company granted High Density Poweretrain, Inc. of Waterford, Michigan (“HDP”) an exclusive, worldwide license to incorporate the company’s constant velocity joint technology in HDP’s family of highly-powered, multifueled, fuel efficient, light weight, cost effective internal combustion engines. In consideration for the grant of the license, the company will receive annual royalties equal to 5% of annual gross revenues generated by the sale of HDP’s multifuel engines, including all sublicense of such technology. There are no minimum royalty payments and the grant does not affect the company’s ability to commercialize its constant velocity joint technology in any other field and/or application. For the years ended December 31, 2008 and 2007, the company did not receive any royalties under this agreement.
Note M - Subsequent Events
(1) On March 6, 2009, the company and a management firm with which the company was in litigation regarding the legality of certain agreements purported executed on June 30, 2004 and April 12, 2005, executed a Settlement Agreement and Release pursuant to which any and all claims and counterclaims the parties may have or may have had arising out of or related to their relationship, arrangement or services provided one to the other were resolved and released and any and all obligations between and among them, specifically including the contested agreements, were terminated effective December 31, 2008.
(2) On February 17, 2009, the board of directors modified the Nonmanagement Directors Plan to provide for monthly payments rather than quarterly payments to qualifying directors, effective for payments made after February, 2009. If payment is made in the company’s common shares, the number of shares issuable is calculated by reference to the closing price of the common stock on the OTCBB as of the last trading day of each prior month.
(3) On February 6, 2009, the company entered into an agreement with a Falls Church, Virginia political consultant firm to access federal dollars to assist the company accelerate the pace of the commercialization process. The agreement is filed as an exhibit to this Form 10-K.
Item 8.
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None
Item 8 (a) CONTROLS and PROCEDURES
James Y. Gleasman, as of December 31, 2008, the company’s chief executive officer and interim chief financial officer, respectively, has informed the board of directors that, based upon his evaluation of the company’s disclosure controls and procedures as of the end of the period covered by this annual report (Form 10-K), such disclosure control and procedures were effective to ensure that information required to be disclosed by the company in the reports it submits under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to management (including the chief executive officer and interim chief financial officer) as appropriate to allow timely decisions regarding required disclosure.
REPORT ON MANAGEMENT’S ASSESSMENT OF INTERNAL CONTROL OVER
FINANCIAL REPORTING
Management of the company is responsible for establishing and maintaining an adequate system of internal control over financial reporting as such term is defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Securities Exchange Act of 1934, as amended. The company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the company’s consolidated financial statements. Our internal control over financial reporting is supported by a program of appropriate reviews by management, written policies and guidelines, careful selection and training of qualified personnel, and a written code of conduct adopted by our company’s board of directors, applicable to all company directors and all officers, consultants and employees of our company.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements and even when determined to be effective, can only provide reasonable assurance with respect to financial statement preparation and presentation. Also, projections or any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. The audit committee of our company’s board of directors meets with the company’s independent registered public accounting firm, management, and internal auditors periodically to discuss internal control over financial reporting, auditing and financial reporting matters. The audit committee reviews with the company’s independent registered public accountants the scope and the results of the audit effort. The audit committee also meets periodically with such accountants and the company’s chief internal accountant without management present to ensure that the independent, registered public accountants and the company’s chief internal accountant have free access to the audit committee. The audit committee’s report can be found in the definitive proxy statement issued in connection with the company’s 2008 annual meeting of shareholders.
Management assessed the effectiveness of the company’s internal control over financial reporting as of December 31, 2008. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in “Internal Control-Integrated Framework.” Based upon our assessment, management concluded that as of December 31, 2008 internal control over financial reporting was effective.
Management, with the participation of the company’s chief executive officer and interim chief financial officer, has concluded that there were no changes in the company’s internal control over financial reporting that occurred during the fourth quarter that has materially affected, or is materially likely to materially affect, the company’s internal control over financial reporting.
This annual report does not include an attestation report of the company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the company’s independent registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the company to provide only management’s report in this annual report.
Item 8B. OTHER INFORMATION
None
PART III
Item 9.
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
(a) Identification of Directors, Executive Officers And Consultants
The following table sets forth certain information about the current directors and executive officers of the company as of December 31, 2008:
**
Changes in Control - To the best knowledge of the company’s management, there are no present arrangements or pledges of the company’s common stock which may result in a change of control of the company. Under the company’s bylaws, the members of the board of directors serve until the next annual meeting of shareholders and until their successors have been elected or appointed and shall have qualified, or until their prior resignation or termination. All directors were reelected to the board at the annual meeting of shareholders held on January 29, 2009.
(b) Business Experience
(1)
Mr. Siconolfi was the owner and general manager of Panorama Dodge, Inc., Penfield, New York from 1984-1995 and of Panorama Collision, Inc., East Rochester, New York from 1989-1995. He started and managed a highly successful auto/truck dealership and collision business, building the business to annual sales of $20 million, with 5 departments and 65 employees.
Prior to opening the dealership and collision business, Mr. Siconolfi acquired an excellent foundation in the automotive business, working in sales, sales management and general management at Vanderstyne Ford, Schrieber Buick, Judge Motor Corporation and Meisenzahl Auto Parts, all in the Rochester area. He has completed 100+ programs sponsored by Chrysler Corporation, Ford Motor Company and General Motors in fields such as management, sales management, sales, customer relations, human resources and service training. He earned numerous awards given by these companies.
A very active participant in his community, Mr. Siconolfi is currently involved in commercial real estate.
(2) James Y. Gleasman has been a director and consultant of the company since its inception. His business background includes the following:
•
Life-long entrepreneur.
•
Skilled in management, finance, strategic planning, organizing and marketing.
•
Principal inventor of the infinitely variable transmissions (IVT); co-inventor of several other patented inventions.
•
Established manufacturing of the Torsen® differential in Argentina, Brazil, etc.
•
Former principal with two companies formerly owned by the Gleasman family.
•
Set business strategies for small companies’ dealings with large companies.
•
Joint venture partner with Clayton Brokerage Co. of St. Louis, MO.
•
Owned financial-consulting business.
•
Negotiated with numerous Asian Corporations (including Mitsubishi and Mitsui).
•
Educated in Asian philosophy, business practices and culture.
(3)
Keith E. Gleasman is co-inventor with Vernon E. Gleasman on all Torvec patents. Mr. Gleasman’s strengths include his extensive marketing and sales executive experience, in addition to his design and development knowledge. His particular expertise has been in the area of defining and demonstrating the products to persons within all levels of the automotive industry, race crew members, educators and students.
•
As former Vice President of Sales for the unrelated Gleason Corporation (Power Systems Division), designed and conducted seminars on vehicle driveline systems for engineers at the U.S. army tank automotive command.
•
Designed a complete nationwide after-market program for the Torsen differential, which included trade show participation for the largest after-market shows in the U.S., SCORE and SEMA.
•
Extensive after-market experience including pricing, distribution, sales catalogs, promotions, trade show booths designs and vehicle sponsorships.
•
Responsible for over 300 articles in trade magazines highlighting the Torsen differential (e.g., Popular Science, Auto Week, Motor Trend, Off-Road, and Four Wheeler).
•
Designed FTV vehicle (from concept to assembly).
•
Assisted in developing engineering and manufacturing procedures for the Torsen differential and for all of the Torvec products.
•
Instructed race teams on use of the Torsen differential (Indy cars, Formula 1, SCCA Trans-Am, IMSA, GTO, GTU, GT-1, NASCAR, truck pullers and off-road racers).
•
Has been trained for up-to-date manufacturing techniques such as NWH, statistical process control and MRP II.
Mr. Gleasman has extensive technical and practical experience, covering all aspect of the company’s products such as, promotion, engineering and manufacturing.
(4)
Dr. Dobbs, Ph.D., P.E., has worked at every level from design engineer to technical director of an Army Major Commodity Command at the two-star level. He has worked as a hands-on engineer and scientist in industry and government, commanded field units, managed Army R & D programs and laboratories and currently has his own practice as a consultant engineer. His broad background has helped guide the company’s growth and development.
•
Worked as a manufacturing engineer.
•
Worked as a design engineer in the aircraft and missile industry.
•
Managed Army laboratories as a captain, lieutenant colonel and colonel.
•
Organized, implemented and operated the theater-wide “Red Ball Express” quick response supply system in Vietnam to get disabled weapons and other critical equipment repaired and back into combat as rapidly as possible.
•
Done basic research on multi-phase turbulent fluid dynamics supporting development of the gas turbine primary power system now used in the M1 Abrams Main Battle Tank (MBT).
•
Managed advanced development of the laser guided 155mm-artillery shell now known as the “Copperhead”.
•
Served in Taiwan as a member of the U.S. Military Assistance Advisory Group (MAAG) working with the Republic of China Army General Staff.
•
Served as liaison officer between the Army and Air Force for development of the laser seeker for the Hellfire missile.
•
Guided development of a new family of tactical vehicles for the Army, including the High Mobility Multipurpose Wheeled Vehicle (HMMWV) now known as the “Hummer”, which uses the Torsen® differential.
•
Served as Technical Director of U.S. Army Tank-automotive Command* (TACOM), which then employed some 6,400 people and is responsible for all support of U.S. military ground vehicles (a fleet of 440,000) from development to ultimate disposal with a budget of nearly $10 billion a year. He was also responsible for negotiation and management of military automotive R&D agreements with the French and German Ministries of Defense.
*
Now the U.S. Army Tank-Armaments Command.
At the end of 1985, Herbert H. Dobbs left government service and started his own consulting practice and began working with the Gleasmans to develop and market Vernon Gleasman’s and Torvec’s inventions. Herbert H. Dobbs holds a Ph.D. in Mechanical Engineering from the University of Michigan and is a registered professional engineer in Michigan. He holds several patents of his own and, among many affiliations, is a member of SAE, ASME, NSPE, AAAS, Sigma XI, AUSA, NDIA and the U.S. Army Science Board. The last named organization is a small group of senior technical and managerial people chosen from industry and academia to provide direct advice to the Secretary of the Army, the Chief of Staff, and the Department of the Army concerning issues of policy, budgets, doctrine, organization, training and technology.
(5)
Daniel R. Bickel is a partner in the accounting firm of Bickel & Dewar, C.P.A.’s, an accounting firm providing a variety of accounting services to small to medium sized business. The services provided include audits, reviews, compilations, business and personal consulting, business acquisition and sale assistance and income tax preparation. Mr. Bickel is a graduate of the Rochester Institute of Technology. He has been licensed in New York State as a certified public accountant for almost 30 years and is a member of the American Institute of Certified Public Accountants and the New York State Society of Certified Public Accountants. He has served as an officer and director of numerous non-profit and civic organizations.
(6)
Asher J. Flaum is President of Flaum Management Co., Inc., a full service real estate company that owns and manages a portfolio of several million square feet of commercial real estate including retail, office, industrial, development projects as well as provides complete real estate brokerage services through its real estate brokerage division. Through his active involvement with Flaum Management, Mr. Flaum focuses on real property management, development, acquisitions and finance, leasing and brokerage services. He has participated in multiple real estate transactions involving Fortune 500, national and regional companies. A licensed real estate broker, Mr. Flaum is a member of the International Council of Shopping Centers (ICSC) and a member of the New York State Commercial Association of Realtors (NYSCAR). Mr. Flaum, who has a B.S. degree from Syracuse University, serves on the board of directors and finance committee of the Jewish Community Federation and on the board of directors of Constellation Brands Marvin Sands Performing Arts Center (CMAC).
(7)
Joseph B. Rizzo, Partner and Head of the Litigation Department of the law firm of Gallo & Iacovangelo, LLP, was born January 17, 1965, in Buffalo, New York. Graduated from Pittsford Mendon High School, 1982; State University of New York at Buffalo, B.A., English, 1986; State University of New York at Buffalo, School of Law, Juris Doctor, 1989. Admitted to practice law in the State of New York, 1990. Associate Attorney with the law firm of Speyer & Perlberg, New York, New York, 1989 to 1995. Joined law firm of Gallo & Iacovangelo, LLP, Rochester, New York in 1995 and became a Partner and Head of the firm’s Litigation Department, 1997 to present. Mr. Rizzo is a published legal commentator and a lecturer for the New York State Bar Association. He is a member of the New York State Bar Association and the National Crime Victims Bar Association. Appears in the “Strathmore’s Who’s Who” 2005-2006 Edition for outstanding leadership and achievement in the practice of law.
(c) Relationships; Agreements
Keith E. and James Y. Gleasman are brothers. There are no other family relationships among any of the directors or executive officers of the company. There are no agreements or arrangements for the nomination or the appointment of any persons to the board of directors.
(d) Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires our directors, our executive officers and persons who own more than 10% of our common stock to file initial reports of ownership (Form 3) and reports of changes in ownership of our common stock (Forms 4 and 5) with the Securities and Exchange Commission. These persons are required by SEC regulations to furnish us with copies of all section 16(a) reports they file.
To the best of the company’s knowledge, based upon its review of all of the copies of Forms 3, 4 and 5 received by it, the company believes that to the extent such forms were required to be filed, such forms were timely filed by the current directors and executive officers pursuant to section 16 of the Securities Exchange Act of 1934, and that no current director or executive officer required to file such forms failed to either file them or file them in timely fashion.
(e) Corporate Governance, Code of Ethics, Director Independence
Role of the Board of Directors
All corporate authority resides in the board of directors as the representative of the shareholders. The board has delegated authority to management in order to implement Torvec’s mission of maximizing long-term shareholder value, while adhering to the laws of the jurisdictions where we operate and at all times observing the highest ethical standards.
Such delegated authority includes the authorization of spending limits and the authority to hire consultants and employees and terminate their services. The board retains responsibility to recommend candidates to the shareholders for election to the Board of Directors. The board retains responsibility for selection and evaluation of the chief executive officer, determination of senior management compensation, approval of the annual budget, assurance of adequate systems, procedures and controls, as well as assisting in the preparation and approval of strategic plans. Additionally, the board provides advice and counsel to senior management.
All major decisions are considered by the board as a whole; however, the board has chosen to exercise certain of its responsibilities through committees of the board. The board has established three standing committees - an Audit Committee, a Nominating Committee, and a Governance and Compensation Committee. On July 8, 2005, the board temporarily created an Executive Committee, composed of a majority of its members and granted to it the full authority of the board, in accordance with and subject to the provisions of section 712 of the New York Business Corporation Law.
It is the company’s policy that all directors attend the annual shareholders meeting. All persons who were directors on the date of the last annual shareholders meeting, January 29, 2009, attended such meeting.
Operation of the Board and its Committees
The company’s common stock is traded on the over-the-counter bulletin board, an electronic inter-dealer quotation system that displays real-time quotes, last-sale prices and volume information. While the bulletin board is owned by the National Association of Securities Dealers, Inc., the company’s common stock is not “listed” for trading on the NASDAQ system or any stock exchange.
Despite the company’s common stock not being so listed, the board has voluntarily adopted and implemented the NASD’s “listed company rules” regulating the composition and operation of the board and its committees as in effect from time to time since the company’s common stock began trading in January, 1999.
The board of directors of the company met and/or took official action 4 times during the year from January 1, 2008. For the 2008 year, each incumbent director attended, either in person or by telephonic conference as permitted by the company’s Bylaws, approximately 100% of the total number of meetings held during the period for which he was a director and approximately 100% of the total number of meetings of the committees of the board on which he served during the period for which he was a member of such committee(s).
Director Independence
Under NASD’s rules applicable to listed companies, a majority of the board must be independent. This requirement means that a majority of the company’s board must be composed of persons who are not executive officers or employees of the company or who have a relationship with the company which, in the board’s opinion, would interfere with the exercise of independent judgment in carrying out his responsibilities as a director. In addition, a person can not be considered independent if he is compensated by the company for any reason other than for service rendered as a member of the board and/or its committees.
Based upon these independence standards and all of the relevant facts and circumstances, the board determined that Daniel R. Bickel, Herbert H. Dobbs, Asher J. Flaum (and during his term of service, David M. Flaum), Joseph B. Rizzo and Gary A. Siconolfi (constituting 5 members of a 7 person board) are independent. In making this determination, the board noted that none of these directors is an executive officer or employee of the company and that each is compensated by the company under its Nonmanagement Directors’ Plan and Commercializing Event Plan solely for service as members of the board and its committees. The board also considered that while Mr. Rizzo is a partner in a law firm that has been engaged in representing the company in certain litigation during the past three years, such relationship does not impair his independence since the amount of fees paid by the company in any one year during such period did not exceed the greater of $200,000 or 5% of such law firm’s gross revenues. In addition, while Mr. Rizzo’s firm continues to represent certain directors in ongoing litigation, his firm no longer represents the company. Further, the board considered that while David M. Flaum and Asher J. Flaum are affiliates of the company’s landlord, 1999 Mt. Read Blvd, LLC. such relationship does not impair either person’s independence since the amount of fees paid by the company since the inception of the lease (a period of less than one year) does not exceed the greater of $200,000 or 5% of such landlord’s gross revenues during such period.
Code of Ethics/Committee Charters
The board has adopted, implemented and published on the company’s website (http://www.torvec.com/) the company’s code of business conduct which applies to all members of the Board, all executive and financial officers and all employees and consultants of the company, its divisions and its subsidiaries. The code mandates that all company personnel observe the highest standards of business and personal conduct in the performance of their duties and responsibilities, especially in dealing with other company personnel, our shareholders, the general public, the business community, customers, suppliers, and governmental authorities. It addresses conflicts of interest, corporate opportunities, confidentiality, fair dealing, protection and proper use of corporate assets, compliance with laws, rules and regulations and requires the reporting of any illegal or unethical behavior.
We require our employees, our officers and directors to talk to supervisors, managers or other appropriate personnel to report and discuss any known or suspected unethical, illegal or criminal activity involving the company and/or its employees. We have established a compliance network which allows employees, officers and directors to anonymously report any known or suspected violation of policies and rules set forth in the code of business conduct.
Waivers or amendments of the code’s provisions are generally not permitted, may be granted only by the board of directors, and if granted, will be disclosed promptly by the company by posting the waiver or amendment on the company’s website and by filing a current report ( Form 8-K) with the Securities and Exchange Commission. There were no waivers of the code during the year ended December 31, 2008.
The board has also adopted, implemented and posted on the company’s website the company’s financial integrity and compliance program. The program mandates that the company’s results of operations and financial position must be recorded in accordance with the requirements of law and generally accepted accounting principles and that all books, records and accounts must be maintained in reasonable detail so that they accurately and fairly reflect the business transactions and disposition of assets of the company. The written policy requires all personnel responsible for the preparation of financial information to ensure that the company’s financial policies and internal control procedures are followed and holds each person involved in creating, processing and recording financial information accountable for the integrity of the financial reporting process. The program establishes a network for the receipt, retention, and treatment of complaints received by the company regarding accounting, internal accounting controls or auditing matters and provides for the submission (including the confidential anonymous submission) by company personnel of any concerns they might have regarding questionable accounting or auditing practices.
On November 9, 2004, the board adopted a statement of corporate governance principles which establishes policies governing the role of the board of directors, its relationship to management, qualifications of directors, independence of directors, the size of the board and selection process, board committees, independence of committee members, meetings of independent directors, shareholder communications, board and committee agendas, ethics and conflicts of interest, reporting and access to advisers. The statement can be found on the company’s website and was attached to the proxy statement filed in connection with the annual meeting of shareholders in January, 2005.
The board adopted an Audit Committee charter delineating the composition and the responsibilities of the Audit Committee which became effective on April 17, 2000. The charter was revised by the board on January 15, 2003 to further delineate the Committee’s responsibilities and authority in accordance with provisions of the Sarbanes-Oxley Act of 2002. The charter is on the company’s website at www.torvec.com. It was filed as an appendix to the proxy statements distributed to shareholders in connection with the 2003 and 2006 annual meetings.
On November 9, 2004, the board adopted a Nominating Committee charter, a copy of which was attached to the company’s proxy statement filed in connection with the annual meeting of shareholders held in January, 2005. The Nominating Committee charter is on the company’s website at http://www.torvec.com/.
Policy/Procedure for Review/ Approval of Related Party Transactions
Business transactions between Torvec and its officers or directors, including companies in which a director or officer (or an immediate family member) has a substantial ownership interest or a company where such director or officer (or an immediate family member) serves as an executive officer (“related party transactions”) are not prohibited. In fact, certain related party transactions can be beneficial to the company and to its shareholders.
It is important, however, to ensure that any related party transactions are beneficial to the company. Accordingly, any related party transaction, regardless of amount, is submitted to the Governance and Compensation Committee in advance for review and approval. All existing related party transactions are reviewed at least annually by the Governance and Compensation Committee. All related party transactions are reviewed by the company’s general counsel to determine the appropriateness of each related party transaction. The Committee may, at its discretion, consult with outside legal counsel.
No related party transaction may be approved by the Committee if such transaction, regardless of its benefit to the company, would violate the company’s written code of business conduct, its written financial integrity and compliance program and/or its statement of corporate governance principles.
Any director or officer with an interest in a related party transaction is expected to recluse himself from considering the matter and voting upon it. In all cases, a director or officer with an interest in a related party transaction may not attempt to influence company personnel in making any decision with respect to the transaction.
Executive Sessions of Independent Directors
The company’s independent directors meet in executive session without management or non-independent directors present. Currently, Gary A. Siconolfi presides at all executive sessions of the independent directors.
Committees of the Board
The Audit Committee
Number of Members: 3
Members:
Daniel R. Bickel (Chair)
Herbert H. Dobbs
Gary A. Siconolfi
Number of Meetings in 2008: 4
Functions:
The primary function of the Audit Committee as stated in its charter is to assist the board of directors in fulfilling its oversight responsibilities relating to monitoring the quality, reliability and integrity of the company’s external financial reporting process, the adequacy of the company’s internal controls particularly with respect to the company’s compliance with legal and regulatory requirements and corporate policy, and the independence and performance of the company’s registered public accounting firm who is ultimately accountable and must report directly to the Audit Committee. More specifically, the Audit Committee is directly responsible for:
• the appointment, compensation, retention and oversight of the work of the independent, registered public accounting firm engaged (including the resolution of disagreements between management and the auditor regarding financial reporting) for the purpose of preparing or issuing an audit report or related work or performing other audit, review or attest services;
• the pre-approval of all auditing and legally permissible non-auditing services to be performed by the company’s independent, registered public accounting firm;
• the disclosure by the company of all pre-approved non-audit services in periodic reports filed by the company with the Securities and Exchange Commission;
• the disclosure by the company of the number and name(s) of each Audit Committee member who is an “audit committee financial expert” as defined by the charter in accordance with rules promulgated by the Securities and Exchange Commission;
• the establishment of internal procedures for complaints concerning the company’s accounting, internal accounting controls or auditing matters;
• the review of internal controls, accounting practices, and financial reporting, including the results of the annual audit and the review of the interim financial statements with management and the independent, registered public accounting firm;
• the engagement of independent counsel and advisors as it determines necessary to carry out its duties and the funding therefore.
All members of the Audit Committee are “independent” as independence is defined in Rule 4200(a)(15) of the National Association of Securities Dealers, Inc. listing standards and as defined by Rule 10A-3(b)(1)(ii) promulgated by the Securities and Exchange Commission. Daniel R. Bickel has been appointed the Audit Committee’s “financial expert” as defined by the Audit Committee’s charter in accordance with rules promulgated by the Securities and Exchange Commission.
The Nominating Committee
Number of Members: 3
Members:
Joseph B. Rizzo (Chair)
Daniel R. Bickel
Gary A. Siconolfi
Number of Meetings in 2008: 2
Functions:
As specified in its charter, the purpose of the Nominating Committee is to identify, consider and recommend qualified individuals to the Board for election as directors, including the slate of directors that the board proposes for election by shareholders at the annual meeting. The charter sets forth the following policy and procedures with respect to the consideration of any director candidates recommended by security holders:
Shareholders wishing to directly nominate candidates for election to the board of directors at an annual meeting must do so by giving notice in writing to the chairman of the Nominating Committee, Torvec, Inc., Mount Read Industrial Facility, 1999 Mount Read Blvd., Rochester, New York 14615. The notice with respect to any annual meeting must be delivered to the chairman not less than 120 days prior to the first anniversary of the preceding year’s annual meeting. The notice shall set forth (a) the name and address of the shareholder who intends to make the nomination; (b) the name, age, business address and residence address of each nominee; (c) the principal occupation or employment of each nominee; (d) the class and number of shares of Torvec securities which are beneficially owned by each nominee and by the nominating shareholder; (e) any other information concerning the nominee that must be disclosed in nominee and proxy solicitations pursuant to Regulation 14A of the Securities Exchange Act of 1934; and (f) the executed consent of each nominee to serve as a director of Torvec if elected.
Nominations submitted in accordance with the foregoing procedure will be considered and voted upon by the Nominating Committee. Any shareholder nominee recommended by the Committee and proposed by the board for election at the next annual meeting of shareholders shall be included in the company’s proxy statement for such annual meeting.
The Nominating Committee charter also sets forth the qualifications and a specific description of skills that members of the board of the company should possess, regardless of by whom nominated:
In recommending candidates, the Committee shall consider the candidates’ mix of skills, experience with businesses and other organizations of comparable size, reputation, background and time availability (in light of anticipated needs), the interplay of the candidate’s experience with the experience of other board members, the extent to which the candidate would be a desirable addition to the board and any committees of the board and any other factors the Committee deems appropriate. At a minimum, the Committee shall address the following skill sets in evaluating director candidates: accounting or finance, business or management experience, industry knowledge, customer base experience or perspective, international marketing and business experience, strategic planning and leadership experience.
Directors should possess the highest personal and professional ethics, integrity and values, and be committed to representing the long-term interest of the shareholders. They must also have an inquisitive and objective perspective, practical wisdom and mature judgment. The board should represent diverse experience at policy making levels in business, government, education and technology, and in areas that are relevant to the company’s worldwide activities.
Directors must be willing to devote sufficient time to carrying out their duties and responsibilities effectively, and should be committed to serve on the board for an extended period of time. Directors should consider offering their resignation in the event that significant change in their personal circumstances, including their health, family responsibilities, or a change in their principal job responsibilities, would preclude them from devoting sufficient time to carrying out their responsibilities effectively.
The board does not believe that arbitrary term limits on director service are appropriate, nor does it believe that directors should expect to be renominated automatically. The contribution of each member as a member of a committee or the board shall be evaluated each year by the Committee before his renomination is recommended to the board.
Each of member of the Nominating Committee is an independent director as defined by Rule 10A-3(b)(1)(ii) promulgated by the Securities and Exchange Commission and as defined by Rule 4200(a)(15) of the National Association of Securities Dealers, Inc.
The Governance and Compensation Committee
Number of Members: 3
Members:
Gary A. Siconolfi (Chair)
Daniel R. Bickel
Joseph B. Rizzo
Number of Meetings: 2
Functions:
The purpose of the Governance and Compensation Committee is to regularly monitor the effectiveness of management’s policies and decisions including the execution of the company’s strategies in order to insure that the company represents the shareholders’ interests, including optimizing long term as well as short term financial returns. The Committee develops and recommends to the board corporate governance principles and guidelines and reviews the charter and composition of each committee of the board and makes recommendations to the board for the adoption of or revisions to committee charters, the creation of additional committees or the elimination of committees.
The Committee also:
(1) establishes and reviews the overall executive compensation philosophy and strategy of the company and oversees the company’s various compensation programs and plans.
(2) reviews and makes recommendations to the board of directors on employment and business consultants compensation policies, forms and levels of annual compensation, including specifically, the performance and level of annual compensation of the executive officers and top management personnel of the company;
(3) specifically reviews the annual compensation of the chief executive officer in the light of established goals and objectives and based upon such evaluation, makes specific recommendations to the board regarding such compensation;
(4) reviews and makes recommendations to the board on the operation, performance and administration of the company’s employee benefit plans, including the company’s Business Consultants Stock Plan, the Nonmanagement Directors Plan and Commercializing Event Plan.
All members of the Committee are independent within the meaning of Rule 10A-3(b)(1)(ii) and Rule 4200(a)(15) promulgated by the Securities and Exchange Commission and the National Association of Securities Dealers, Inc. respectively.
The Executive Committee
Number of Members: 5
Members:
Gary A. Siconolfi (Chair)
Daniel R. Bickel
Herbert H. Dobbs
James Y. Gleasman
Keith E. Gleasman
Number of Meetings: 1
Functions
On July 8, 2005, the board of directors created an Executive Committee. The members of the committee constitute a majority of the company’s board, and is composed of 2 of the company’s founders who have guided the company from inception, a long-term advisor to the Gleasman family and the company, especially on military matters (Dr. Dobbs), and an individual who was nominated and elected for the express purpose of representing the interests of all of the company’s shareholders, including its minority shareholders (Mr. Siconolfi).
As permitted by section 712 of the New York Business Corporation Law and the company’s Bylaws, the Executive Committee has and may exercise all of the powers and authority of the board (including but not limited to engaging such attorneys and advisors on terms determined by the Executive Committee, including the payment of retainers, fees and expenses of such advisors, with such reasonable retainers, fees and expenses of such advisors to be paid by the company), provided, however, that the Executive Committee does not have the authority to:
(i) submit matters requiring shareholder approval under the Business Corporation Law ;
(ii) fill vacancies in the board of directors or in any committee;
(iii) fix compensation of the directors for serving on the board of directors or on any committee;
(iv) amend or repeal the company’s Bylaws; or
(v) amend or repeal any resolution of the board which by its terms is not amenable or repealable.
Shareholder Communications
The company encourages all shareholders to communicate with management and with our directors, including our independent directors. Any shareholder wishing to communicate directly with management should e-mail or address regular mail to:
Any shareholder wishing to communicate directly with any of our independent directors should e-mail him as follows:
Herbert H. Dobbs
dr.hh.dobbs@earthlink.net
Joseph Rizzo
josephrizzo@gallolaw.com
Daniel R. Bickel
dbickel@frontiernet.net
Gary A. Siconolfi
gary1015@rochester.rr.com
Asher J. Flaum
aflaum@flaummgt.com
Regular mail may be addressed to:
Torvec Independent Directors c/o Torvec, Inc.
Mt. Read Industrial Facility
1999 Mt. Read Blvd.
Rochester, New York 14615
Attention: Gary A. Siconolfi
Sarbanes-Oxley Compliance
The Sarbanes-Oxley Act of 2002 was enacted on July 30, 2002. The statute addresses, among other issues, corporate governance, auditing and accounting, executive compensation and enhanced and timely disclosure of corporate information. On November 4, 2003, the National Association of Securities Dealers, Inc. adopted final NASD Rules addressing corporate governance, director independence and corporate accountability. The NASD has amended these Rules from time to time.
The company’s board of directors has acted to strengthen and improve its already strong corporate governance policies and practices as a result of the Act and Rules. A summary of formal policies the board has adopted to comply with Sarbanes-Oxley, the NASD Rules and to enhance shareholder confidence in the company and its management is found beginning on page _____
of this annual report.
A majority of the members of the company’s board of directors and of its executive committee are independent within the meaning of Rule 10A-3(b)(1)(ii) promulgated by the Securities and Exchange Commission and Rule 4200 (a) (15) promulgated by the National Association of Securities Dealers, Inc.
Item 10.
Item 10. EXECUTIVE COMPENSATION
(a) Compensation Discussion and Analysis
The company is a development stage company which means that the company has not generated significant revenues on an ongoing basis. Since its inception in September, 1996, the company’s principal business activity has consisted of research, development and patenting its automotive technologies worldwide. Since inception through December 31, 2008, the company has relied primarily on monies generated by the sale of its common and Preferred equity to sustain its business. During 2007 and 2008, the company generated limited revenues from the sale of certain of its products. The board of directors has adopted and has consistently followed a policy to expend the proceeds of equity sales and any revenues generated by the sale of its products directly on the costs and expenses associated with the actual development and manufacture of its products (including the development of prototypes, pre-production and production-ready models, and the leasing of research and testing facilities).
Current Compensation Philosophy
In the light of the above described facts and circumstances, the board has developed a current compensation philosophy based upon the following elements:
• compensation payable to the company’s chief executive officer, interim chief financial officer and president for services rendered is to be paid in cash but actual payment is to be deferred until the company has the requisite cash to pay these officers. The determination of whether the company has the requisite cash is to be made solely by the board of directors in the light of approved budgets, existing and anticipated capital requirements and existing and estimated cash flows. Unpaid amounts are accumulated and carry over from one year to the next. The rate of compensation payable to each of these two officers is currently $300,000 and pursuant to the deferral policy, no amount owing to each of such officers pursuant to this compensation plan has actually been paid to them through December 31, 2008;
• current compensation payable for services rendered by individuals, including engineering, business consulting, legal and patent services, as well as for services rendered by non-executive management and the company’s nonmanagement directors, is to be paid to the extent feasible pursuant to the company’s business consultants’ stock plan. The company has registered common shares issuable under the plan so that nonaffiliates are able to sell such shares immediately and affiliates are able to sell such shares without regard to the “restricted stock” provisions of Rule 144 promulgated by the Securities and Exchange Commission;
• the number of common shares to be issued in satisfaction of consultants’ invoices is to be calculated as of the date of the invoice or, in the case of retainer agreements, on the date(s) specified in the retainer agreement(s). With respect to calculating the number of shares to be issued under the Nonmanagement Directors’ Plan and to the company’s general counsel, the number of shares is to be calculated based upon the closing price of the company’s $.01 par value common stock on the last trading day of each calendar quarter immediately preceding the date of payment;
• all of the policies described above were adopted by the board of directors upon the recommendation of the Governance and Compensation Committee, a committee composed of independent directors. The specific annual rates of current compensation payable to each of the individuals is set by this committee and is commensurate with the level of current compensation payable for the services rendered by persons in the capacities indicated in the greater metropolitan Rochester, New York region.
More specifically, the Governance and Compensation Committee recommended and on March 28, 2007, the board of directors approved a compensation plan for each of James Y. Gleasman, the company’s chief executive and interim financial officer, and Keith E. Gleasman, the company’s president. Under the plan, the company has agreed to pay $300,000 per annum to each of the Gleasmans. However, no amount is actually payable to either of them unless and until the board of directors determines that the company has the requisite cash to pay all or any portion of such amounts. This determination is to be made in the light of the company’s budgeted cash requirements, existing and anticipated capital requirements and existing and estimated cash flows, all determined in accordance with generally accepted accounting principles consistently applied, as such principles are interpreted by accounting standards and interpretations promulgated from time to time by FASB. If any portion of the annual payment is not paid in any given year, the unpaid amount is accumulated and carried forward until such time as the company shall have the requisite cash to make such payment. The company’s promise to pay the Gleasmans such annual payments is not secured or collateralized by any of the company’s assets or its equity.
The factors utilized by the committee in making its recommendation and the board in approving the plan were:
(i) the fact that neither of the Gleasmans had been paid any compensation during the period commencing January 1, 2004 and ending December 31, 2006 ( a three year period);
(ii) the fact that for the year ended December 31, 2002, the Gleasman’s compensation was not paid but was converted into common stock options exercisable at $5.00 per share which options were not exercised, have expired and were not replaced;
(iii) the fact that for the year ended December 31, 2003, the Gleasman’s compensation was not paid but was converted into common stock options exercisable at $5.00 per share which options have not been exercised and expire on December 22, 2013;
(iv) the fact that such payments are not merely to compensate the Gleasmans for services rendered as executive officers but also for their agreement to convey all patents, improvements and know-how with respect to the company’s automotive technologies to the company on an ongoing basis;
(v) based upon a review of compensation arrangements of executive officers of public companies located in the greater Rochester, New York metropolitan area, taking into account that most of these other arrangements include change of control provisions, disability and retirement benefits and severance packagers - none of which being a specific feature of the plan.
Long-Term Compensation Philosophy
The core of the board’s long-term compensation philosophy is based upon its realization that the company’s shareholders will be rewarded only by a business transaction involving the commercialization of one or more of the company’s automotive technologies. This means that the company sells, licenses, enters into supply contracts, receives purchase orders and/or enters into any other arrangement for any of the company’s technologies in a manner designed to generate revenue for the company. This can also mean that the company itself is acquired in a business combination such that the company’s shareholders will receive cash, the buyer’s stock or a combination of cash and purchaser stock.
The board concluded that while directors, officers and key management personnel should be provided with a long-term financial incentive to commercialize the company’s technologies, such incentive should be provided only upon a commercializing event which benefits the company’s shareholders. The board also concluded that such incentive should be directly proportional to the dollar amount of gross revenue expected to be generated by the commercializing event.
To accomplish this goal, the board adopted a commercializing event plan designed to reward the company’s directors, executive officers and specified management and engineering personnel for the successful completion of one or more commercializing events. Under the plan, business consultants’ shares will be issued to participants in the plan if and only if a revenue-producing business transaction is consummated.
The commercializing event plan (2007 Event Plan) provides as follows:
Participants
All directors, executive officers, management and engineering personnel engaged by the company.
Any other individual recommended by the Governance Committee and approved by the board of directors from time to time.
Effective Date of 2007 Event Plan
October 10, 2007
Salient Terms of the 2007 Event Plan
Upon the happening of any commercializing event, each of the directors, executive officers and specified management personnel are entitled to share equally in 6% of the gross revenues derived or to be derived from the transaction and/or transactions constituting a commercializing event. Upon the happening of any commercializing event, each of the specified engineering consultants shall be entitled to share equally in 2% of the gross revenues derived and/or to be derived from the transaction and/or transactions constituting a commercializing event.
The amount payable to each individual who was a participant in the 2007 Event Plan as of the 2007 Event Plan’s effective date, October 10, 2007, shall be paid in business consulting shares of the company at a rate of $3.00 per share, the closing price of the company’s common stock on the OTCBB on such date. This means, by way of illustration, that for each $1,000,000 or proportionate amount thereof in gross revenue generated by a commercializing event, each individual who was a director, officer or specified management participant as of October 10, 2007 shall be entitled to receive 2,222 business consulting shares ($1,000,000 multiplied by .06 divided by nine participants divided by $3.00). Each specified engineering participant as of October 10, 2007 shall be entitled to receive 1,667 business consulting shares ($1,000,000 multiplied by .02 divided by four participants divided by $3.00).
Additional individuals may be added to the 2007 Event Plan from time to time, either at the 6% management level or at the 2% engineering level. With respect to each additional individual, however, the actual number of shares issuable as the result of any commercializing event shall be calculated based upon the closing price of the company’s common stock on the OTCBB (or if the company’s shares are listed on an exchange, including NASDAQ, on such exchange) on the date the individual becomes a participant in the 2007 Event Plan. In no event, however, may the calculation be based upon a rate which is less than $3.00 per share.
In order to actually receive payment under the 2007 Event Plan, each participant must be both a) employed by, a consultant to or associated with Torvec and b) judged to be “in good standing” with the company at the time of any and all such payments, all as determined by the board of directors as of the date of the Board’s authorization of payments to be made under the 2007 Event Plan.
For purposes of 2007 Event Plan, a commercializing event shall consist in any completed transaction, or series of completed transactions, regardless of form, structure or size and/or dollar amount by which the company and/or its shareholders derive gross revenue or are expected to derive gross revenue under the terms of the transaction and/or the terms of any agreement or working arrangement entered into by the company. For purposes of the 2007 Event Plan, payments to be made to participants with respect to each given commercializing event shall be made in full upon the finalization of the commercializing event even if the company is to be paid in installments or some other type of revenue-deferred arrangement. Where payments are to be made pursuant to an arrangement, such as a license or supply contract, where the aggregate consideration to be received by the company as the result of the commercializing event is not stated, the aggregate dollar-value ascribed to the license, supply contract or similar instrument based upon an estimate of the total dollars to be received over the term of the instrument shall be utilized for purposes of fixing the gross revenues to be derived from the commercializing event.
Participants in the 2007 Event Plan shall be entitled to receive payments regardless of the number of commercializing events with respect to each individual piece of technology.
On March 28, 2008 the board of directors approved amendments to the 2007 Event Plan recommended by the Governance and Compensation committee to clarify that:
1) for purposes of the good standing requirement, all participants are considered to be in good standing unless a unanimous vote of the board of directors determines otherwise. In making this determination, the board is required to consider whether a person has engaged in conduct which has significantly harmed the company and to consider that any material violation of the company’s Code of Conduct shall constitute prima facie evidence that the company has been harmed;
2) participants shall be entitled to payment even though the participant is not actively engaged as a consultant to or employee of the company if the reason for not being so engaged is due to death, disability from accident, disease or similar circumstance beyond the participant’s control or is on a leave of absence approved by an authorized officer;
3) the 2007 Event Plan shall terminate no earlier than October 10, 2017 but that subject to such condition, the 2007 Event Plan may be terminated by the board of directors in its sole direction;
4) the benefits provided by the 2007 Event Plan may not be reduced during its term as to amount, time, method, manner of payment and/or any other material condition;
5) distributions under the 2007 Event Plan shall be made on a commercializing event by commercializing event basis;
6) if the entire company is acquired in a transaction where Torvec’s common shareholders receive shares issued by the acquiring company, the number of shares distributable to the participants in the 2007 Event Plan shall be calculated based upon the greater of $3.00 or trading price of the acquiring company on the date the acquisition is announced publically.
On February 25, 2008, the company issued an aggregate 3,648 business consultants shares to thirteen participants in the 2007 Event Plan (304 shares to each of nine director, executive officer and specified management participants and 228 shares to each of four specified engineer participants) upon the completed sale of six constant velocity joints to a military contractor.
On April 30, 2008, the company issued an aggregate 5,581 business consultant shares to thirteen participants in the 2007 Event Plan (465 shares to each of nine director, officer and specified management participants and 349 shares to each of four specified engineer participants) upon receipt of the first quarterly reimbursement from Ice Engineering, LLC. with respect to the company’s assignment of its ice technology license.
On November 10, 2008, the company issued an aggregate 2,832 business consultant shares to thirteen participants in the 2007 Event Plan (236 shares to each of nine director, officer and specified management participants and 177 shares to each of four specified engineer participants) upon receipt of revenues from the completed sale of the company’s FTV® to the Air Force.
SUMMARY COMPENSATION TABLE FOR YEARS
ENDED DECEMBER 31, 2006, 2007 and 2008
OUTSTANDING EQUITY AWARDS AT DECEMBER 31, 2008
DIRECTOR COMPENSATION FOR THE YEAR ENDED DECEMBER 31, 2008
(b) Discussion of Director Compensation
1) Participation in the Nonmanagement Directors’ Plan
At its meeting held on October 19, 2004, the board adopted a Nonmanagement Directors’ Plan for directors who are not employees, consultants or part of management for services exclusively rendered by them as directors, including services rendered as chairman of the company’s standing committees.
As originally adopted and as in force through July 1, 2006, the plan provided that nonmanagement directors who have been board members for at least one full year and have attended, in person or by telephonic conference as permitted by our by-laws, at least 75% of both board meetings and meetings of committees of which they are a member were entitled to receive on a yearly basis, warrants to purchase up to 12,000 common shares at a purchase price of $.01 per share. The warrants were issued quarterly on a pro rata basis and were issued contingently in anticipation of a director’s satisfactory completion of one year of service and/or 75% of board/committee meetings. The warrant term was for a period of ten years. In addition, the chairman of the audit committee was entitled to earn as payment for services on such committee 5,000 warrants per year, payable quarterly.
On October 13, 2006, the board modified the plan to provide that, effective for periods commencing on and after July 1, 2006, a stipulated sum per annum should be paid to each nonmanagement director solely for his service as a director, with the amount of such payment determined by the board from time to time, based upon such considerations as risk, number of meetings, monitoring and reviewing company compliance with the Sarbanes-Oxley Act as well as all other applicable local, state, national and international rules and regulations, development and implementation of policies, including establishing and reviewing executive compensation, longevity, 24-hour a day availability, as well as oversight of management’s pursuit of one or more commercializing events for the company’s technologies. Until adjusted in accordance with such factors, the board determined that each nonmanagement director shall be paid $25,200 per annum exclusively for board and committee service, payable pro rata on a quarterly basis, provided each such director shall have attended, either in person or via telephonic conference, 75% of the meetings of the board and of the committee(s) of which he is a member, such attendance measured on an annual basis. Such amount shall be paid either in cash, business consultants stock or a combination of both and is payable to a newly elected director on a prospective basis upon his election as a director.
At the same meeting, the board also determined that a stipulated sum per annum should be paid to those nonmanagement directors serving as chairman of the board, chairman of the executive committee, chairman of the audit committee, chairman of the nominating committee and chairman of the compensation and governance committee, exclusively for service rendered in such capacities. Until further adjusted, the board determined that the chairman of the board shall be paid $7,500 per annum, the chairman of the executive committee shall be paid $12,000 per annum, the chairman of the audit committee shall be paid $12,000 per annum, the chairman of the nominating committee shall be paid $5,100 per annum and the chairman of the governance and compensation committee shall be paid $5,100 per annum. Such amounts are to be paid pro rata on a quarterly basis with payments made in cash, business consultants stock or a combination of both and is payable to a newly elected chairman on a prospective basis upon his election as chairman. With respect to amounts payable to chairmen for calendar 2006, such amounts shall be payable retroactively to January 1, 2006(except for the audit committee chairman who has received payment for the six month period ended June 30, 2006).
Each unexercised, nonmanagement director warrant outstanding as of October 13, 2006 was amended to provide that such warrants may be exercised only upon the happening of the earlier to occur of the following events: death or disability of the director, termination of his service as a director, change in control of the company or the sale, license or other commercial transfer of a substantial amount of the company’s assets, all of such terms to be interpreted in accordance with the provisions of section 409A of the Internal Revenue Code of 1986 and the regulations promulgated thereunder.
On October 10, 2007, the governance and compensation committee recommended and on October 31, 2007, the Board of Directors approved amendments to the Nonmanagement Directors’ Plan, effective for the quarter commencing July 1, 2007 and for all subsequent quarters commencing thereafter.
The first amendment provided for an across the board increase of 5% per annum to the amounts payable for board service and an additional across the board increase of 5% per annum for service as chairman of the committees enumerated. Thus, under the first amendment, each director would receive $26,460 for board and committee service per annum. The chairman of the audit committee would receive an additional $13,125 per annum and the chairman of the nominating committee would receive an additional $5,355 per annum.
In recognition of the circumstance that the chairman of the board, chairman of the governance and compensation committee and the chairman of the executive committee is the same individual, the value of such service performed by such individual and the fact that the time expended by such individual in service to the company in each of these positions has expanded greatly as the result of the Sarbanes-Oxley Act, the Board approved an increase in the fee payable to such person to $125,000 per annum.
Daniel R. Bickel, Herbert H. Dobbs, Joseph B. Rizzo, Gary A. Siconolfi and David M. Flaum until his resignation on October 10, 2008 were each eligible to participate in the Nonmanagement Directors’ Plan in 2008. Asher J. Flaum became eligible to participate in the plan.
Keith E. Gleasman and James Y. Gleasman were not eligible to participate since they are executive officers of the company.
2) Participation in 1998 Stock Option Plan
On December 1, 1997, the company’s board of directors adopted the company’s 1998 Stock Option Plan pursuant to which officers, directors, key employees and/or consultants of the company may be granted incentive stock options and/or non-qualified stock options to purchase up to an aggregate of 2,000,000 shares of the company’s common stock. On May 27, 1998, the company’s shareholders approved the 1998 Stock Option Plan. On December 17, 1998, the company registered the shares reserved for issuance under the 1998 Stock Option Plan under the Securities Act of 1933.
With respect to incentive stock options, the Stock Option Plan provided that the exercise price of each such option must be at least equal to 100% of the fair market value of the common stock on the date that such option is granted (110% of fair market value in the case of shareholders who, at the time the option is granted, own more than 10% of the total outstanding common stock), and required that all such options have an expiration date not later than the date which is one day before the tenth anniversary of the date of the grant of such options (or the fifth anniversary of the date of grant in the case of 10% shareholders). However, in the event that the option holder ceases to be an employee of the company, such option holder’s incentive options immediately terminate. Pursuant to the provisions of the Stock Option Plan, the aggregate fair market value, determined as of the date(s) of grant, for which incentive stock options are first exercisable by an option holder during any one calendar year cannot exceed $100,000.
With respect to non-qualified stock options, the Stock Option permitted the exercise price to be less than the fair market value of the common stock on the date the option is granted and permitted Board discretion with respect to the establishment of the terms of such options. Unless the Board otherwise determined, in the event that the option holder ceases to be an employee of the company, such option holder’s non-qualified options immediately terminate.
As of December 31, 2008, current and former officers and directors held 396,393 common stock options, exercisable until 2013 at $5.00 per share.
The Stock Option Plan terminated on May 27, 2008. Consequently, no new options will be granted under the Stock Option Plan although outstanding options remain exercisable in accordance with their terms.
Item 11.
Item 11.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS
Security Ownership - Common Stock
The following table presents information concerning the beneficial ownership of the shares of our common stock as of December 31, 2008 by:
•
each person who is known by us to beneficially own more than 5% of our common stock;
•
each of our directors;
•
each of our named executive officers; and
•
all of our directors and executive officers as a group.
The number and percentage of shares beneficially owned are based on 32,811,432 shares of common stock outstanding as of December 31, 2008. Beneficial ownership is determined under rules promulgated by the Securities and Exchange Commission. Shares of common stock subject to options that are exercisable on December 31, 2008 or exercisable within 60 days thereafter are deemed to be outstanding and beneficially owned by the person holding the options for the purpose of calculating the number of shares beneficially owned and the percentage ownership of that person, but are not deemed to be outstanding for the purpose of calculating the percentage ownership of any other person. Except as indicated in the footnotes to this table, these persons have sole voting and investment power with respect to all shares of our common stock shown as beneficially owned by them.
Security Ownership - Preferred Stock
No director, executive officer and/or 5% shareholder owns any of our Class A Preferred.
Mrs. Margaret F. Gleasman, an owner of more than 5% of the company’s common stock, owns 5,000 Class B Preferred.
Item 12.
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
Certain Transactions
Other than as described herein, there have been no material transactions, series of similar transactions or currently proposed transactions to which the company was or is a party, in which the amount invested exceeds $120,000 and in which any director or executive officer, or any security holder who is known to the company to own of record or beneficially more than five percent of the company’s common stock, or any member of the immediate family of any of the foregoing persons, had a material interest.
Director Independence
See Item 12 of this annual report for a discussion regarding the independence of our directors under standards set forth by the Securities and Exchange Commission and by the National Association of Securities Dealers, Inc.
Item 13.
Item 13. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Principal Accountant Fees and Services
Audit Fees
Eisner LLP served as the company’s independent registered public accounting firm for the years ended December 31, 2008 and 2007. The aggregate amount the company paid for professional services rendered by Eisner LLP for the audit of the company’s annual consolidated financial statements included in the company’s annual report on Form 10-K, for the review of the company’s consolidated financial statements included in the company’s quarterly reports on Form 10-Q, and for services normally provided in connection with statutory and regulatory filings or engagements for each of those two years was:
Audit-Related Fees
The Company did not engage Eisner LLP for any audit related fees for the year ended December 31, 2007.
Tax Fees
The company did not engage Eisner LLP for any tax services for the years ended December 31, 2008 and 2007.
All Other Fees
The company did not engage Eisner LLP for any other services for the years ended December 31, 2008 and 2007.
Total Fees
The company paid Eisner LLP a total of $120,000 for the year ended December 31, 2008 in fees, compared to approximately $170,500 of the total paid for 2007. The shareholders approved the Audit Committee’s appointment of Eisner LLP as the company’s independent registered public accounting firm for the year ended December 31, 2008 at the annual meeting of shareholders held on January 29, 2009.
Pre-Approval of Policies and Procedures
Article II of our Audit Committee Charter, as amended, specifically provides that the Audit Committee must pre-approve all auditing and legally permissible non-auditing services to be performed by the company’s registered public accounting firm. In accordance with such mandate, at a meeting held on January 15, 2003, the Audit Committee established a set of procedures governing the pre-approval process. Under the procedure, for each fiscal year, the Committee first shall determine the general nature and scope of the audit, audit-related, tax and other legally permissible non-audit services to be performed by the company’s registered accounting firm. Prior to the performance of any services, the Committee shall require such firm to submit to the Committee one or more engagement letter(s) delineating specific audit, audit-related, tax and other legally permissible non-audit services to be rendered (together with a schedule of fees with respect to each of such services). Upon receipt of such engagement letter(s), the Committee shall review and approve such engagement letter(s) in advance of the performance of any such services, including the specific advance approval of fees in connection with each of such services. Upon approval and execution of each of such engagement letter(s) by the Committee, the registered public accounting firm shall perform such pre-approved services in accordance with the terms and conditions of each engagement letter and shall not engage in any other services unless each of said services, if any, shall have been specifically approved (including the specific approval of all fees associated therewith) by the Audit Committee in advance of the rendering any such service.
Audit -Committee Approval
The Audit Committee pre-approved 100% of the services rendered by Eisner LLP in accordance with such Committee’s Pre-Approval Policies and Procedures.
Item 14.
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
The following Exhibits, as applicable, are attached to this Annual Report (Form 10-K). The Exhibit Index is found on the page immediately succeeding the signature page and the Exhibits follow on the pages immediately succeeding the Exhibit Index.
(2) Plan of acquisition, reorganization, arrangement, liquidation, or succession
(3) Articles of Incorporation, By-laws
(4) Instruments defining the rights of holders including indentures
None
(9) Voting Trust Agreement
None
(10) Material Contracts
10.1
Certain Employment Agreements, Consulting Agreements, certain assignments of patents, patent properties, technology and know-how to the Company, Neri Service and Space Agreement and Ford Motor Company Agreement and Extension of Term, all incorporated by reference to Form 10-SB/A, Registration Statement, registering Company’s $.01 par value common stock under section 12(g) of the Securities Exchange Act of 1934;
(11) Statement re computation of per share earnings (loss)
Not applicable
(14) Code of Ethics
(16) Letter on change in certifying accountant
None
(18) Letter re change in accounting principles
None
(20) Other documents or statements to security holders
None
(21) Subsidiaries of the registrant
Ice Surface Development, Inc. (New York)
Iso-Torque Corporation (New York)
IVT Diesel Corp. (New York)
Variable Gear, LLC (New York)
(22) Published report regarding matters submitted to vote of security holders
None
(23) Consents of experts and counsel
(23.1) Eisner LLP Consent
(24) Power of attorney
None
(31) Rule 13(a)-14(a)/15(d)-14(a) Certifications
(32) Section 1350 Certifications
(99) Additional exhibits
None
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Dated: March 31, 2009
By:
/s/ James Y. Gleasman
James Y. Gleasman,
Chief Executive Officer,
Interim Chief Financial Officer and Director
Dated: March 31, 2009
By:
/s/ Keith E. Gleasman
Keith E. Gleasman,
President and Director
Dated: March 31, 2009
By:
/s/ Herbert H. Dobbs
Herbert H. Dobbs,
Secretary and Director
Dated: March 31, 2009
By:
/s/ Daniel R. Bickel
Daniel R. Bickel,
Director
Dated: March 31, 2009
By:
/s/ Joseph R.Rizzo
Joseph R. Rizzo,
Director
Dated: March 31, 2009
By:
/s/ Asher J. Flaum
Asher J. Flaum,
Director
Dated: March 31, 2009
By:
/s/ Gary A. Siconolfi
Gary A. Siconolfi,
Director
EXHIBIT INDEX