ITEM 1.  FINANCIAL STATEMENTS

 

Airtrax Inc.

Balance Sheets

September 30, 2007 and December 31, 2006

Restated

 

		September 30, 2007				December 31, 2006
		(Unaudited)				(Audited )
ASSETS
Current assets
Cash		$	466,129			$	327,737
Accounts receivable			53,078				50,704
Inventory			1,040,100				1,049,457
Prepaid expenses			22,793
Vendor advances			163,268				103,628
Deferred tax asset			1,212,741				919,889
Total current assets			2,958,109				2,451,415
Fixed assets			645,512				623,136
Less, accumulated depreciation			(394,566				(339,216	)
Net fixed assets			250,946				283,920
Other assets
Deferred financing costs & other			275,701				133,918
Prepaid interest			368,563
Patents – net			136,476				148,151
Total other assets			780,740				282,069
TOTAL ASSETS			3,989,795			$	3,017,404
LIABILITIES AND STOCKHOLDERS’ DEFICIENCY
Current liabilities
Accounts payable		$	373,173			$	1,097,361
Accrued liabilities			1,077,788				437,140
Shareholder loans payable			40,713				75,713
Current portion-convertible debt, net of discount			2,143,828				1,830,200
Derivative liability-warrants and conversion privileges			2,189,123				236,144
Total current liabilities			5,824,625				3,676,558
Long term convertible debt, net of discount			1,467,383				531,542
TOTAL LIABILITIES			7,292,008				4,208,100
Stockholders’ deficiency
Preferred stock – authorized; 5,000,000 shares, no par value, 275,000 issued and outstanding			12,950				12,950
Common stock – authorized, 100,000,000 shares; no par value, issued and outstanding –  25,884,072 and 24,260,352, respectively			22,372,759				21,520,559
Paid in capital – options			1,417,660				1,407,299
Paid in capital – warrants			2,290,939				2,315,935
Accumulated  deficit			(29,396,521	)			(26,447,439	)
Total stockholders’ deficiency			(3,302,213	)			(1,190,696	)
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIENCY		$	3,989,795			$	3,017,404

 

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

 

 

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Airtrax Inc.

Statements of Operations

Three and Nine Month Periods Ended

September 30, 2007 and 2006

Unaudited and Restated

 

		Three Month Period Ended September 30								Nine Month Period Ended September 30,
		2007				2006				2007				2006
Revenues		$	269,022			$	-			$	523,082			$	1,271,277
Cost of sales			204,496				-				488,999				1,193,815
Gross profit			64,526								34,083				77,462
Operating and administrative expenses
General and administrative costs			876,732				1,233,830				2,374,202				3,068,523
Impairment of Filco advances			-				1,000,000				-				2,000,000
Total operating expenses			876,732				2,233,830				2,374,202				5,068,523
Operating loss			(812,206				(2,233,830	)			(2,340,119	)			(4,991,061	)
Other income <expense>, net
Interest expense			(167,083	)			(58,045	)			(446,290	)			(165,320	)
Revaluation income			691,672				331,604				2,761,229				814,045
Amortization of financing costs			(98,178	)			(88,056	)			(253,768	)			(346,824	)
Amortization of debt discounts			(472,790	)			(141,375	)			(1,151,331	)			(359,200	)
Liquidated damages			(81,000	)							(443,000	)			(214,247	)
Settlement expenses			-				(226,485	)			-				(290,801	)
Excess cost of liabilities over proceeds			-				-				(1,401,901	)			-
Other income			9,590				-				33,246				85
Total other income <expense>, net			(117,789	)			(182,357	)			(901,815	)			(562,262	)
Net loss before taxes			(929,995	)			(2,416,187	)			(3,241,934	)			(5,553,323	)
Income tax benefit (State): Current			141,196				196,477				292,852				545,727
Net loss before dividends			(788,799	)			(2,219,710	)			(2,949,082	)			(5,007,596	)
Deemed dividends on preferred stock			-				-				-				303,110
Net loss attributable to common stockholders			(788,799	)			(2,219,710	)			(2,949,082	)			(5,310,706	)
Preferred stock dividends paid															112,500
Deficit attributable to common stockholders		$	(788,799	)		$	(2,219,710	)		$	(2,949,082	)		$	(5,423,206	)
Net loss per share - basic and diluted
Loss attributable to common stockholders		$	(788,799	)		$	(2,219,710	)		$	(2,949,082	)		$	(5,310,706	)
Adjustment for preferred stock dividends accumulated			(17,188	)			(17,188	)			(51,563	)			(51,563	)
Net loss attributable to common stockholders		$	(805,987	)		$	(2,236,898	)		$	(3,000,645	)		$	(5,362,269	)
Net loss per share - basic and diluted		$	(0.03	)		$	(0.11	)		$	(0.12	)		$	(0.24	)
Weighted average shares outstanding			25,294,876				20,951,187				24,890,142				22,694,207

 

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

 

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Airtrax Inc.

Statements of Cash Flows

For The Nine Months Ended September 30, 2007 and 2006

Unaudited and Restated

 

		2007				2006
Cash flows from operating activities:
Net loss		$	(2,949,082	)		$	(5,310,706	)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization			56,365				46,125
Amortization of debt discounts			1,405,099				706,024
Excess costs of liabilities over proceeds			1,401,901
Impairment of Filco advances							2,000,000
Common stock issued in settlement of obligations for interest			15,736				66,160
Equity securities issued for services			597,531				1,325,264
Expense of settling liquidated damages			442,613				316,110
Deemed dividend on preferred stock							303,110
Amortization of prepaid interest			146,543
Increase in accrual of deferred tax benefit			(292,852	)			(545,727	)
Revaluation of liabilities for warrants and conversion privileges			(2,761,229	)			(814,045	)
Interest accrual on shareholder loan			(22,793	)			9,193
Changes in assets liabilities:
Increase in accounts receivable			(2,375	)			(98,641	)
Increase in vendor advances			(59,640	)			(42,128	)
(Decrease) increase in accounts payable			(596,424	)			219,247
Increase in prepaid expense			(22,793	)
Increase (decrease) in accrued liabilities			106,726				(65,579	)
Increase in inventory			9,357				570,495
Net cash used in operating activities			(2,525,317	)			(1,315,098	)
Cash flows from investing activities:
Acquisition of equipment			(22,376	)			(12,649	)
Additions to patent cost			(1,015	)			(6,800	)
Net cash used in investing activities			(23,391	)			(19,449	)
Cash flows from financing activities:
Proceeds from convertible debt			-				1,219,800
Proceeds from the sale of common stock			2,822,100				65,500
Proceeds from warrant extensions			-				117,000
Proceeds from bank loan			-				13,900
Payment of convertible debt			(100,000	)			-
Proceeds from notes payable to related parties			-				69,813
Payment of notes payable to related parties			(35,000	)			(170,754	)
Net cash provided by financing activities			2,687,100				1,315,259
Net increase (decrease) in cash			138,392				(19,288	)
Cash, beginning of year			327,737				19,288
Cash, end of year		$	466,129			$	-

 

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

 

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Airtrax, Inc.

Notes to the Financial Statements

September 30, 2007

(Unaudited)

NOTE 1–BASIS OF PRESENTATION AND BUSINESS

The unaudited  interim amended and restated financial statements of Airtrax, Inc. (“the Company”) as of September 30, 2007,  and for the three and nine  months ended September 30, 2007 and 2006 (restated),  have been prepared in accordance with accounting principles generally accepted in the United States of America, which contemplates continuation of the Company as a going concern.  At September 30, 2007, the Company had a working capital deficit of $2,866,516, and a retained deficit of $29,396,521 .

In prior periods, the Company was a development stage company, as defined in Statement of Financial Accounting Standards (FASB) No. 7. The Company became an operational company in 2005. The Company has incurred losses since its inception. Until the end of 2004, these losses were financed by private placements of equity securities. During 2005 and 2006, the Company obtained financing almost exclusively from the issuance of convertible debentures along with other securities (derivatives). The Company will need to raise additional capital through the issuance of future debt or equity securities to continue to fund its operations.

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

In the opinion of management, the information included in this report contains all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results of such periods.  The results of operations for the three and nine months ended September 30, 2007 are not necessarily indicative of the results to be expected for the full fiscal year ending December 31, 2007.

Certain information and disclosures normally included in the notes to financial statements have been condensed or omitted as permitted by the rules and regulations of the Securities and Exchange Commission, although the Company believes the disclosure is adequate to make the information presented not misleading.  The accompanying unaudited quarterly financial statements should be read in conjunction with the amended and restated audited financial statements and footnotes thereto included in the Company’s annual report on Form 10-KSB/ A for the year ended December 31, 2006.

NOTE 2– RESTATEMENTS

In conjunction with our independent registered public accounting firm and professional advisors, the Company conducted an analysis of our various financial instruments and agreements involving convertible debt and common stock financings accompanied by warrants, with a particular focus on the accounting treatment of derivative financial instruments under Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS 133”), the Emerging Issues Task Force issued EITF Issue No. 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock (“EITF 00-19”), and FASB Staff Position No. EITF 00-19-2, “Accounting for Registration Payment Arrangements” (“EITF 00-19-2”), (collectively, the “Derivative Accounting Pronouncements”). Accordingly, certain accounting policies we previously considered to reflect what was deemed to be appropriate at the time when the financings were previously reported, have been modified by recent interpretations, including the Derivative Accounting Pronouncements.

On November 2, 2007, as a result of this analysis, the Company filed a Form 8-K noting that its previously filed financial statements in the annual reports for the years ended December 31, 2004, 2005 and 2006 filed on Form 10-KSB, together with the quarterly reports on Form 10-QSB for the quarters ending March 31, 2005, June 30, 2005, September 30, 2005, March 31, 2006, June 30, 2006, September 30, 2006, March 31, 2007, June 30, 2007 and September 30, 2007(collectively, the “Reports”) could no longer be relied upon.  The Company sent a formal letter request to the Office of the Chief Accountant (OCA) of the Security and Exchange Commission (SEC) dated December 17, 2007,  petitioning the OCA to waive  the requirement to file separate amended and restated Reports for the periods  noted above, and instead, file a comprehensive amended and restated  comparative Form 10-KSB for the years ended December 31, 2006 and 2005, along with certain comprehensive financial information and disclosures for 2004, and comprehensive amended and restated  comparative Form 10-QSBs for the periods ended March 31, 2007, June 30, 2007, and September 30, 2007 along with certain comprehensive financial information and disclosures for 2005. This waiver was received from the OCA on December 27, 2007.

 

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Airtrax, Inc.

Notes to the Financial Statements

September 30, 2007

(Unaudited)

The February 2007 convertible debt issuance includes certain variable conversion pricing which results in the actual maximum number of potential shares needed to satisfy the conversion of such debt to be unknown and not quantifiable at the date of issuance.  EITF 00-19-2 specifies that debt issuances with variable conversion pricing for which there is no established “floor” in the conversion pricing, and where the maximum number of shares needed to satisfy the conversion of such debt is not known, should be accounted for as derivative liabilities and revalued at the end of each reporting period. When a derivative classified as a liability is exercised, cancelled, or the maximum number of shares needed to satisfy the conversion of such debt is known, the fair value of the derivative, as determined at that time, is revalued and transferred to equity, and is no longer revalued.  To the extent that the initial fair values of the derivative liabilities exceed the net proceeds received, an immediate charge to the statement of operations is recognized, for the excess. As of September 30, 2007, the Company recognized in the statement of operations excess costs over debt proceeds of $1,401,901 related to the excess of derivative liabilities over the net proceeds received for the February 2007 debt issuance.  The remainder of the discount from the face value of the convertible debt resulting from allocating part or all of the proceeds to the derivative liabilities is amortized over the life of the instrument through periodic charges to the statements of operations, using the straight line method, which was the most systematic and rational approach that approximated the interest method of amortization due to the short two year amortization term of the debt. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period. Derivative liabilities are classified in the balance sheet as current or non-current based on the classification previously elected for the host instrument.

The restatement is required to properly reflect the Company’s financial results for certain non-cash, and non-operational related charges or credits to earnings associated with both embedded and freestanding derivative liabilities, and the accounting for certain derivatives under the control of the issuer, and those involving variable conversion pricing, due to the revised interpretation and implementation of the Derivative Accounting Pronouncements.

The Company has made adjustments to its accounting records in the restated amounts to more fully comply with requirements of the Derivative Accounting Pronouncements, and the Securities and Exchange Commission (SEC) dealing with derivatives.  Among these adjustments were reductions in the balances of derivative liabilities, offset by reductions in the amounts of debt discount, the amounts of paid in capital-warrants, revaluation income, and common stock.  The adjustments to the common stock were caused by the elimination of credits to common stock that had resulted principally from the erroneous recognition of liabilities for conversion privileges upon issuances of convertible debt.  These credits were erroneously transferred to pay in capital upon debt conversion.  Other partial offsets to these adjustments affected the amounts of amortization expense and paid in capital-warrants.

The effects of these changes on the Company’s previously issued unaudited September 30, 2007 and 2006 financial statements and the related disclosures included elsewhere in the notes to financial statements, along with the comprehensive disclosures of the restated financial statements as of September 30, 2005, are as follows:

 

The effect on the Company's previously issued September 30, 2007;

 

The effect on the Company's previously issued September 30, 2007;
Balance Sheet as of September 30, 2007
		Previously				Increase								As
		Reported				(decrease)								Restated
Deferred financing fees		$	2,642,050			$	(2,366,349	)			(1	)		$	275,701
Total assets		$	6,356,144			$	(2,366,349	)						$	3,989,795
Current portion-convertible debt, net of discounts		$	2,183,297			$	(39,469	)			(1	)		$	2,143,828
Derivative liability-warrants and conversion privileges			1,047,814				1,141,309				(2	)(3)			2,189,123
Total current liabilities			4,722,785				1,101,840								5,824,625
Long term-convertible debt, net of discounts			3,734,039				(2,266,656	)			(1	)			1,467,383
Total liabilities			8,456,824				(1,164,816	)							7,292,008
Paid in capital-warrants			4,729,407				(2,438,468	)			(3	)			2,290,939
Accumulated deficit			(30,633,456	)			1,236,935				(4	)			(29,396,521	)
Total stockholders deficiency			(2,100,680	)			(1,201,533	)							(3,302,213	)
Total Liabilities and stock holders deficiency		$	6,356,144			$	(2,366,349	)						$	3,989,795

 

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Airtrax, Inc.

Notes to the Financial Statements

September 30, 2007

(Unaudited)

 

 

 

Statement of Operations for the Nine Month Period Ended September 30, 2007
		Previously				Increase								As
		Reported				(decrease)								Restated
General and administrative costs		$	(2,817,202	)		$	443,000				(13	)		$	(2,374,202	)
Operating loss			(2,783,119	)			443,000								(2,340,119	)
Other Income and Expense:
Revaluation income			566,862				2,194,367				(11	)			(2,761,229	)
							(60,224	)			(15	)
Amortization of defered financing fees			(1,344,875	)			1,151,331				(14	)			(253,768	)
Amortization of debt discounts			-				(1,151,331	)			(14	)			(1,151,331	)
Excess discounts expensed			-				(1,401,901	)			(6	)			(1,401,901	)
Liquidated damages			-				(443,000	)			(13	)			(443,000	)
Total other expense, net			(1,191,057	)			289,242								(901,815	)
Net loss before taxes		$	(3,974,176	)		$	732,242							$	(3,241,934	)
Loss per share-basic and diluted		$	(0.16	)		$	0.03							$	(0.13	)
Statement of Operations for the Three Month Period Ended September 30, 2007
		Previously				Increase								As
		Reported				(decrease)								Restated
General and administrative costs		$	(957,732	)		$	81,000				(13	)		$	(876,732	)
Operating loss			(893,206	)			81,000								(812,206	)
Other Income and Expense:
Revaluation income			181,786				509,886				(11	)			691,672
							(46,889	)			(15	)
Amortization of defered financing fees			(524,079	)			472,790				(14	)			(98,178	)
Amortization of debt discounts			-				(472,790	)			(14	)			(472,790	)
Liquidated damages			-				(81,000	)			(13	)			(81,000	)
Total other expense, net			(499,686	)			381,897								(117,789	)
Net loss before taxes		$	(1,392,892	)		$	462,897							$	(929,995	)
Loss per share-basic and diluted		$	(0.06	)		$	0.02							$	(0.04	)
Statement of Cash Flows for the Nine Months Ended September 30, 2007
		Previously				Increase								As
		Reported				(decrease)								Restated
Net loss		$	(3,681,324	)		$	732,242							$	(2,949,082	)
Amortization of debt discounts and fees			1,344,875				60,224				(7	)			1,405,099
Excess discounts expensed during this period			-				1,401,901				(6	)			1,401,901
Revaluation of liabilities for warrants and
			(566,862	)			(2,194,367	)			(3	)			(2,761,229	)
Net cash used in operating activities		$	(2,525,317	)		$	-							$	(2,525,317	)

 

 

 

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Airtrax, Inc.

Notes to the Financial Statements

September 30, 2007

(Unaudited)

 

 

 

 

 

The effect on the Company's previously issued September 30, 2006
Statement of Operations for the nine months ended September 30, 2006
		Previously				Increase								As
		Reported				(Decrease)								Restated
General and administrative costs		$	(3,149,144	)		$	80,621				(8	) (13)		$	(3,068,523	)
Operating loss			(5,071,682	)			80,621								(4,991,061	)
Other income expense:
Amortization of defferred financing fees			(706,024	)			359,200				(14	)			(346,834	)
Amortization of debt discount and financing costs			-				(359,200	)			(10	)			(359,200	)
Liquidated damages			(424,427	)			210,180								(214,247	)
Settlement expenses			-				(290,801	)							(290,801	)
Total other expense, net			(481,641	)			(80,621	)							(562,262	)
Net loss before taxes		$	(5,553,323	)		$	-							$	(5,553,323	)
Loss per share-basic and diluted		$	(0.24	)		$	-							$	(0.24	)

 

Statement of Operations for the three months ended September 30, 2006
		Previously				Increase								As
		Reported				(Decrease)								Restated
General and administrative costs		$	(1,224,433	)		$	(9,397	)			(8	)(13)		$	(1,233,830	)
Operating loss			(2,224,433	)			(9,397	)							(2,233,830	)
Other income and expense:
Revaluation income			90,519				241,085				(11	)			331,604
Amortization of financing costs			(229,431	)			141,375				(14	)			(88,056	)
Amortization of debt discounts			-				(141,375	)			(14	)			(141,375	)
Liquidated damages			(235,612	)			235,612				(16	)			-
Settlement expenses			-				(226,485	)			(13	)			(226,485	)
Total other expense (net)			(432,569	)			250,212								(182,357	)
Net loss before taxes		$	(2,657,002	)		$	240,815							$	(2,416,187	)
Loss per share-basic and diluted		$	(0.13	)		$	0.01							$	(0.12	)

 

 

 

 

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Airtrax, Inc.

Notes to the Financial Statements

September 30, 2007

(Unaudited)

 

Adjustments were made to record

 

(1)

Issuance costs of debt obligations have been separately reported on the balance sheet as deferred financing fees.  The value of derivatives and other securities accompanying debt issuances have been subtracted from the issuance proceeds and the remaining amounts reported as convertible debt.  The combined total of the issuance costs and the values of derivatives and other securities accompanying debt issuances are being amortized over the terms of the issues.  The adoption of this procedure resulted in adjustments to deferred financing costs and the carrying amounts of the debt issuances.

(2)	The increase in the derivative liability account is principally the result in a change to a more appropriate Black Scholes model for valuing conversion privileges.

(3)

The warrants that accompanied the February 2007 convertible debt issue were erroneously recorded in an equity account, rather than as a derivative liability.  Simultaneously with this correction, which increased the balance of the derivative liability account, the warrants were revalued, increasing revaluation income and reducing the derivative liability accounts.

(4)	The accumulated deficit is the combined result of a restatement reduction in the 2006 balance ($504,693) and the current restatement of the results of operations ($732,242).

(5)	Amortization of deferred financing fees has been reclassified to a separate expense category.  In addition, a $60,224 error was corrected in the calculation of the amortization.

(6)	The initial values of the derivative liabilities stemming from the February 2007 convertible debt issue exceeded the net proceeds received by $1,401,901.  This excess was erroneously not previously recorded.  It has now been corrected.

(7)	Correction of an error in the calculation of amortization of debt discounts and fees.

(8)

Operating expense has been reduced, reflecting a change in the accounting for conversion privileges.  Previously, the value of such privileges were treated as liabilities and charged to expense.  Many of these privileges are now classified as equity.  When debt was issued to settle liquidated damages, the expense charge was to settlement charges.  These charges were reduced as a result of this change in accounting.

(9)

Conversion privileges were previously treated as liabilities and conversion expense charged.  The privileges associated with many of these issues are now judged to be items of equity and there is no expense charge.

(10)	In the past, issuance cost and debt discounts were written off in the periods in which they were incurred.  This practice has been corrected so that they are now amortized over the lives of the related debt.

(11)

The derivatives associated with most of the securities issues are now classified as equity.  Previously many of them were classified as liabilities subject to periodic revaluation.  This latter practice resulted in significant revaluation adjustments.  Under present procedures, such adjustments are limited in amount.

(12)	Correction of an error in reporting the change in accrued liabilities.

(13)	Liquidated damages and settlement expenses have been reclassified from operating expenses to separately captioned items in other income (expense).

(14)	Amortization of debt discounts and deferred financing fees have been reclassified to separately captioned items.

(15)	Correction of calculation of amortization.

(16)	Liquidated damages were settled prior to the third quarter of 2006, but were accrued in error.

 

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Airtrax, Inc.

Notes to the Financial Statements

September 30, 2007

(Unaudited)

NOTE 3-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

Use of Estimates

Preparing the Company’s financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect 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 revenues and expenses during the reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents

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

Fair Value of Financial Instruments

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

Concentrations of Credit Risk

Financial instruments subject the Company to concentrations of credit risk.  The Company places its cash and temporary cash investments with credit quality institutions.  At times, such investments may be in excess of applicable government mandated insurance limits.  With respect to accounts receivable, the Company limits credit risk by performing ongoing credit evaluations.  Management does not believe significant risk exists in connection with the Company’s concentrations of credit at September 30, 2007.

Accounts Receivable

The Company provides an allowance for doubtful accounts (when necessary) equal to the estimated uncollectible amounts.  The Company’s estimate is based on historical collection experience and a review of the current status of trade accounts receivable.  It is reasonably possible that the Company’s estimate of the allowance for doubtful accounts will change.  As of September 30, 2007 and 2006 there were no allowances for doubtful accounts.

Inventories

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

Fixed Assets

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

 

13

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Airtrax, Inc.

Notes to the Financial Statements

September 30, 2007

(Unaudited)

Intangibles

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

In accordance with Statement of Financial Accounting Standards  No. 142, “Goodwill and Other Intangible Assets ,” the Company reviews intangibles for impairment annually, or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of the Company's business enterprise below its carrying value. The impairment test requires us to estimate the fair value of the Company's overall business enterprise down to the reporting unit level. The Company performs its annual impairment test in its fiscal fourth quarter. No impairment charges related to goodwill or other intangibles were recorded in the nine months ended September 30, 2007 and 2006.

The Company continually evaluates whether events and changes in circumstances warrant revised estimates of useful lives or recognition of an impairment loss of our intangibles, which as of September 30, 2007, consist mainly of patents and licensing agreements.  The conditions that would trigger an impairment assessment of our intangible assets include a significant, sustained negative trend in our operating results or cash flows, a decrease in demand for our products, a change in the competitive environment and other industry and economic factors.

Deferred Financing Costs

Deferred financing costs represent legal, commitment; processing, consulting, and other fees associated with the issuance of the Company’s debt and any unamortized debt discount related to derivative separation from the debt instrument. Deferred financing costs are being amortized over the terms of the related debt.

Impairment of Long-Lived Assets  

Pursuant to Statement of Financial Accounting Standards No.  144, “Accounting for the Impairment or Disposal of Long-lived Assets”, the Company continually monitors events and changes in circumstances that could indicate carrying amounts of long-lived assets may not be recoverable. An impairment loss is recognized when expected cash flows are less than the asset's carrying value. Accordingly, when indicators of impairment are present, the Company evaluates the carrying value of such assets in relation to the operating performance and future undiscounted cash flows of the underlying assets. The Company’s policy is to record an impairment loss when it is determined that the carrying amount of the asset may not be recoverable. No impairment charges were recorded in the nine month periods presented ended September 30, 2007, while impairment reserves of $2,000,000 were recorded for the nine months ended September 30, 2006.

Revenue Recognition

Revenue on product sales is recognized when persuasive evidence of an arrangement exists, such as when a purchase order or contract is received from the customer, the price is fixed, title to the goods has changed and there is a reasonable assurance of collection of the sales proceeds. We obtain written purchase authorizations from our customers for a specified amount of product at a specified price and consider delivery to have occurred at the time of shipment. Revenue is recognized at shipment.

 

14

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Airtrax, Inc.

Notes to the Financial Statements

September 30, 2007

(Unaudited)

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

Advertising Costs

Advertising costs are expensed as incurred.  Advertising expense totaled $7,028 and $5,764 for the nine months ended September 30, 2007 and 2006, respectively.

Accounting for Income Taxes

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

Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. We have recorded a valuation allowance of $8,300,000 as of September 30, 2007, due to uncertainties related to our ability to utilize some of our deferred tax assets, primarily consisting of certain net operating losses carried forward before they expire and certain accrued expenses, which are deferred for income tax purposes until paid. The valuation allowance is based on our estimates of taxable income and the period over which our deferred tax assets will be recoverable. The net deferred tax asset as of September 30, 2007 was $1,212,741, net of the valuation allowance.

Accounting for Derivatives

The Company’s issuances of convertible debt are accompanied by other financial instruments. These financial instruments include warrants to purchase stock, and the right to convert debt to stock at specified rates (“conversion benefits.”). Pursuant to SFAS 133, Accounting for Derivative Instruments and Hedging Activities, as amended, and EITF Issue No. 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, A Company’s Own Stock, the Company has identified certain embedded and freestanding derivative instruments. Generally, where the ability to physical or “net-share settle” an embedded conversion option or free standing financial instrument is not deemed to be within the control of the Company, the embedded conversion option is required to be bifurcated or separated, and both the freestanding instruments and bifurcated conversion feature are accounted for as derivative liabilities. At each reporting date, the Company estimates the fair values of all derivatives, and changes in the fair value are charged to operations.

Under EITF 00-19, warrants are considered free-standing instruments in that they are legally detachable and separately exercisable. The conversion benefits, which are embedded in these debt issues, derive value from the relationship between the stock price and debt conversion price, and are considered embedded derivatives under the provisions of SFAS 133. The fair values of both the warrants and conversion benefits are calculated using a Black-Schools Model, taking into consideration factors such as the underlying price of the common stock, the exercise price for warrants or the conversion price for the conversion benefit, the stock volatility, and the risk-free interest rates available for comparable time periods.

 

15

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Airtrax, Inc.

Notes to the Financial Statements

September 30, 2007

(Unaudited)

 

Free-standing instruments (warrants), and embedded derivatives (conversion benefits) which are initially bifurcated or separated from the host financial instrument, are recorded as separate liabilities, in cases where the security holder has a right to choose to receive a “net settlement” of cash. The identification of such net settlement provisions for prior convertible debt issuances with warrants resulted in the Company concluding that such warrants should have been identified as “derivatives”, and therefore the warrant liabilities must be recorded as a separate derivative liability on the Company’s restated balance sheet, and marked to market for each subsequent reporting period with any non-cash charges or credits attributed to the revised fair value of the liability being recognized through earnings.

If the decision to settle the outstanding liability remains with the Company, the value of the warrants should be recorded in an equity account. The identification of the settlement provisions being controlled by the Company under certain debt issuances resulted in the Company determining that the warrants should be reflected in the restated Reports as components of equity, as compared to having been previously recorded as liabilities with non-cash charges and/or credits to earnings as a result of being marked to market for each period presented.  As of September 30, 2007 and 2006, the Company recognized and recorded the value of certain warrants as equity of $2,290,939 and $2,273,733, respectively, in the accompanying financials.

EITF 00-19-2 specifies that the contingent obligations to make future payments or otherwise transfer consideration under a registration payment arrangement, whether issued as a separate agreement or included as a provision of a financial instrument or other agreement, should be separately recognized and measured in accordance with SFAS No. 5, “Accounting for Contingencies.” EITF 00-19-2 also requires additional disclosure regarding the nature of any registration payment arrangements, alternative settlement methods, the maximum potential amount of consideration and the current carrying amount of the liability, if any. The Company previously adopted the provisions of EITF 00-19-2 for the reporting period effective January 1, 2007 , and does not estimate that any additional contingency accruals and/or disclosures would be required to be included in the Company’s restated Reports other than those items expected to be reflected in the respective amended and restated Reports.

The Company also previously sold stock units which included warrants along with common stock. In these cases, a portion of the proceeds equal to the value of the warrants is allocated to the warrants (when a net settlement provision exists for cash), with the balance allocated to the stock. In such cases, the value of the warrants are treated as liabilities, and the balance is revalued at the end of each reporting period with any change in value being recognized currently as a non-cash charge and/or credit to earnings. When a warrant classified as a liability is exercised or cancelled, the fair value of the warrant, as determined at the time of exercise or cancellation, is transferred to equity, and is no longer revalued. A similar adjustment is made for a conversion benefit classified as a liability when the debt is converted to stock, or cancelled.

The February 2007 convertible debt issuance includes certain variable conversion pricing which results in the actual maximum number of potential shares needed to satisfy the conversion of such debt to be unknown and not quantifiable at the date of issuance.  EITF 00-19-2 specifies that debt issuances with variable conversion pricing for which there is no established “floor” in the conversion pricing, and where the maximum number of shares needed to satisfy the conversion of such debt is not known, should be accounted for as derivative liabilities and revalued at the end of each reporting period. When a derivative classified as a liability is exercised, cancelled, or the maximum number of shares needed to satisfy the conversion of such debt is known, the fair value of the derivative, as determined at that time, is revalued and transferred to equity, and is no longer revalued.  To the extent that the initial fair values of the derivative liabilities exceed the net proceeds received, an immediate charge to the statement of operations is recognized, for the excess. As of September 30, 2007, the Company recognized in the statement of operations excess costs over debt proceeds of $1,401,901 related to the excess of derivative liabilities over the net proceeds received for the February 2007 debt issuance.  The remainder of the discount from the face value of the convertible debt resulting from allocating part or all of the proceeds to the derivative liabilities is amortized over the life of the instrument through periodic charges to the statements of operations, using the straight line method, which was the most systematic and rational approach that approximated the interest method of amortization due to the short two year amortization term of the debt. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period. Derivative liabilities are classified in the balance sheet as current or non-current based on the classification previously elected for the host instrument.

 

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Airtrax, Inc.

Notes to the Financial Statements

September 30, 2007

(Unaudited)

 

For embedded and free standing derivatives valued as of September 30, 2007 and 2006, the Company has recognized in the statement of operations, revaluation income of $2,761,229 and $ 814,045, respectively, for the nine months ended September 30, 2007 and 2006. In addition, the Company recognized a derivative liability in the accompanying balance sheet for conversion privileges and warrants of $2,189,127 in 2007 and $640,452 in 2006.

 

The estimated fair values of the derivatives have been calculated based on the Black-Scholes Model, using the following assumptions as of September 30:

 

		2007	2006
	Fair Value of Stock	$ .30	$ .95
	Exercise Price	$ .45 - $1.25	$1.56- $1.65
	Dividend Yield	0%	0%
	Risk Free Interest Rate	4. 33% -4. 65%	4.717
	Expected Volatility	88.13%	89.68%
	Expected Life-Years	1.42-4.15 years	2.38-2.85 years

 

Stock Based Compensation

Common Stock for Services

Because of the significant liquidity issues the Company has faced since our inception, the Company has issued common stock to third party vendors and others in order to pay for services rendered.  Such issuances are recorded as an expense in the period in which the services are performed. During the nine month period ended September 30, 2007 and 2006, the Company issued an aggregate of 586,609 and 673,373 shares, respectively, of common stock to third parties in exchange for services performed.  There were 147,059 shares of common stock of the Company issued for services in the three month period ended September 30, 2007.

Stock Options

Stock options are awarded to employees as compensation for services. Such awards have been immediately exercisable. The Company adopted SFAS 123R, “Share Based Payment” and SFAS 148, “Accounting for Stock Based Compensation - Transition and Disclosure” on January 1, 2006. No stock options were issued, cancelled or exercised in 2007.  Pursuant to the requirements of SFAS 123R, the weighted average fair value of options granted during the nine months ended September 30, 2006, as determined on the dates of grant, were $.25.

Warrants

The Company has issued warrants both as part of “stock units”, and as an integral part of convertible note issues.  The value of the warrants and conversion options which are classified as liabilities are revalued each reporting period.  These values are determined by a Black-Scholes Model, consistent with 2006.  The Company’s recording of a liability for these Registration Payment Arrangements (RPA’s) follow the guidelines in SFAS 5, “Accounting for Contingencies.”  However, the amendment to the original EITF 00-19 will not affect the recording of derivatives as the “RPA’s” were not the sole determining factor in prior decisions about derivative classification, as is emphasized in the amended EITF. The following is a schedule of changes in warrants outstanding through the third quarter of 2007 which included the issuance of 200,000 warrants on August 26, 2007 with a five year life and an exercise price of $1.00 completed during the quarter ended September 30, 2007.  Each of these warrants is exercisable over five year periods from dates of issuance at prices ranging from $0.45-$1.56 per share.

 

17

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Airtrax, Inc.

Notes to the Financial Statements

September 30, 2007

(Unaudited)

The following summaries the 2007 Warrant issuance activity:

 

	Balance, December 31, 2006	10,383,323
	Warrants Issued-February 2007	16,595,732
	Warrants Issued-Placement Agent	715,333
	Warrant Issuance-August 26, 2007	200,000
	Total Warrant Issuances-2007	17,511,065
	Balance, September 30, 2007	27,894,388

Basic and Diluted Loss Per Share

In accordance with Statement of Financial Accounting Standards No.  128, “Earnings Per Share,” and SEC Staff Accounting Bulletin (SAB) No.  98, both basic and diluted loss per share (“EPS”) are presented on the face of the income statement. Basic EPS is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding. Diluted EPS is computed similarly to basic EPS, except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were not anti-dilutive. The Company has excluded all common stock equivalents arising from outstanding options, warrants, convertible preferred stock and convertible debt from the calculation of diluted net loss per share because these securities are anti-dilutive. As of September 30, 2007 and 2006, the Company had approximately 24,890,142 and 22,694,207 weighted average number of shares, respectively, outstanding and used in both the Basic and Diluted EPS calculation.

 

Segment Reporting

Management treats the operations of the Company as one single segment.

Reclassifications

Certain amounts in the 2006 financial statements have been reclassified to conform   to the 2007 financial statement presentation.

NOTE 4- 2007 CAPITALIZATION TRANSACTIONS

2007 CONVERTIBLE NOTE FINANCING AND STOCK TRANSACTIONS

On February 20, 2007, the Company entered into a Securities Purchase Agreement (the "Purchase Agreement") with certain accredited and/or qualified institutional investors pursuant to which the Company sold an aggregate of $3,734,040 principal amount secured convertible debentures (the "February 2007 Debentures") convertible into shares of common stock, no par value ("Common Stock") at a conversion price equal to $0.45 (the "Conversion Price"). The Debentures were sold at a discount equal to the amounts of interest that will accrue at a simple rate of 8% per annum during the term of the debentures.  The amount realized was $3,219,000; this was further reduced by expenses of the sale of $396,900.  In addition, the Company issued to the investors (i) warrants to purchase 8,297,866 shares of Common Stock (the "Warrants") at an exercise price equal to $0.54 per share, which represents 100% of the number of shares issuable upon conversion of the Debentures; (ii) callable warrants to purchase 4,148,933 shares of Common Stock at an exercise price equal to $0.75 per share, which represents 50% of the number of shares issuable upon conversion of the Debentures; and (iii) callable warrants to purchase 4,148,933 shares of  Common Stock at an exercise price equal to $1.25 per share, which represents 50% of the number of shares issuable upon conversion of the Debentures (collectively, the "Callable Warrants").  In addition to the expenses of the sale, noted above, 715,333 warrants to purchase common stock were issued to the placement agent that arranged the financing.

 

18

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Airtrax, Inc.

Notes to the Financial Statements

September 30, 2007

(unaudited)

 

The February 2007 Debentures mature on February 20, 2009.  The Company may,  in its discretion,  redeem the February 2007 Debentures, subject to certain equity conditions being met by the Company as set forth in the Debentures, at a price equal to 150% of the principal balance, accrued interest, and all liquidated damages, if any, thereon that are requested to be redeemed. The Company’s obligations under the Purchase Agreement, the February 2007 Debentures and the additional definitive agreements with respect to this transaction are secured by all of the assets of the Company.

The Conversion Price of the February 2007 Debentures is subject to the following adjustments for any failure by the Company to cause the Securities and Exchange Commission (the "SEC") to declare the initial registration statement covering the shares underlying the Debentures, the Warrants and the Callable Warrants effective:

·

if the initial registration statement is not declared effective on or before February 20, 2008, the Conversion Price applicable to an amount of conversion shares equal to the highest number of shares of Common Stock which can be sold by the holder pursuant to Rule 144, promulgated under the Securities Act of 1933, as amended (the "144 Amount"), shall be adjusted to equal the lesser of (i) the then Conversion Price and (ii) 80% of the average of the 3 lowest closing prices of the Common Stock during the 10 trading days immediately preceding February 20, 2008;

·

if the initial registration statement is not declared effective on or before April 20, 2008, the Conversion Price applicable to an amount of conversion shares equal to the 144 Amount shall be adjusted to equal the lesser of (i) the then Conversion Price and (ii) 80% of the average of the 3 lowest closing prices of the Common Stock during the 10 Trading Days immediately preceding April 20, 2008;

·

if the initial registration statement is not declared effective on or before July 20, 2008, the Conversion Price applicable to an amount of conversion shares equal to the 144 Amount shall be adjusted to equal the lesser of (i) the then Conversion Price and (ii) 80% of the average of the 3 lowest closing prices of the Common Stock during the 10 trading days immediately preceding July 20, 2008;

·

if the initial registration statement is not declared effective on or before October 20, 2008, the Conversion Price applicable to an amount of conversion shares equal to the 144 Amount shall be adjusted to equal the lesser of (i) the then Conversion Price and (ii) 80% of the average of the 3 lowest closing prices of the Common Stock during the 10 trading days immediately preceding October 20, 2008; and

·

if the initial registration statement is not declared effective on or before February 20, 2009, the Conversion Price applicable to an amount of conversion shares equal to the 144 Amount shall be adjusted to equal the lesser of (i) the then Conversion Price and (ii) 80% of the average of the 3 lowest closing prices of the Common Stock during the 10 trading days immediately preceding February 20, 2009.

The Conversion Price of the February 2007 Debentures and the respective exercise prices of the Warrants and the Callable Warrants are subject to adjustment in certain events, including, without limitation, upon the consolidation, merger or sale of all of substantially all of the assets, a reclassification of our Common Stock, or any stock splits, combinations or dividends with respect to the Common Stock.

 

In addition, after such time as the SEC declares the registration statement effective, if (i) the volume weighted average price for each of the 10 consecutive trading days (the "Measurement Period") exceeds $1.50 per share with respect to the $0.75 Callable Warrants and $2.50 with respect to the $1.25 Callable Warrants, (ii) the daily volume for each trading day in such Measurement Period exceeds 250,000 shares of Common Stock per trading day, and (iii) the holder is not in possession of any information that constitutes, or might constitute, material non-public information, then the Company may, within one trading day of the end of such Measurement Period, call for cancellation of all or any portion of the Callable Warrants which have not yet been exercised at a price equal to $.001 per share.

 

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Airtrax, Inc.

Notes to the Financial Statements

September 30, 2007

(unaudited)

Under the Registration Rights Agreement,  the Company entered into with the investors on February 20, 2007, the Company is obligated to file a registration statement on Form SB-2 to effect the registration of 130% the Common Stock issuable upon conversion of the Debentures and exercise of the Warrants, the Callable Warrants and the selling agent warrants (as described below) on the earlier of (i) 15 calendar days from the filing of the annual report on Form 10-KSB for the fiscal year ended December 31, 2006, or (ii) April 15, 2007 (the "Filing Date").  The Company is obligated to use its best efforts to cause the registration statement to be declared effective no later than 90 days after the Filing Date. If we do not file the registration statement by the Filing Date, or if the registration statement is not declared effective by the SEC within the deadline specified in the preceding sentence, the Company shall pay to the investors, as liquidated damages, an amount equal to 1.25% of the principal amount of the Debentures on a pro rata basis for each 30-day period of such registration default.  On May 4, 2007, the Company filed the registration statement, and as a result has an obligation for liquidated damages.

   

Further, the Company paid commissions of $321,900 and issued 715,333 warrants to First Montauk Securities Corp. (the "Selling Agent"), a NASD member firm, which acted as Selling Agent for the transaction, each as consideration for services performed in connection with the purchase and sale of the Debentures, Warrants and Callable Warrants to the investors pursuant to the Purchase Agreement.  The Selling Agent had no obligation to buy any Debentures, Warrants or Callable Warrants from us. In addition, the Company agreed to indemnify the Selling Agent and other persons against specific liabilities under the Securities Act of 1933, as amended.

The Company claimed an exemption from the registration requirements of the Act for the private placement of these securities pursuant to Section 4(2) of the Act and/or Regulation D promulgated there under since, among other things, the transaction did not involve a public offering, the Investors were accredited investors and/or qualified institutional buyers, the Investors had access to information about the Company and their investment, the Investors took the securities for investment and not resale, and  the Company took appropriate measures to restrict the transfer of the securities.

OTHER 2007 CAPITALIZATION TRANSACTIONS

On March 1, 2007, an investor in the convertible debt issue October 2005 converted $22,500 of the 8% Convertible Notes due October 18, 2007.  In exchange, the Company issued 50,000 shares of common stock.  The conversion price was $0.45 per share.

On April 18, 2007, an investor in the October 2005 convertible debt issue converted $45,000 of the 8% Convertible Notes due October 18, 2007.  In exchange, the Company issued 100,000 shares of common stock.  The conversion price was $0.45 per share.

 

On June 1, 2007, an investor in the June 2005 convertible debt issue converted $246,797 of principal and $15,736 of accrued interest of the 8% Convertible Notes due June 2007 in exchange, the Company issued 583,407 shares of common stock.  The conversion price was $0.45 per share.

 

On June 5, 2007, an investor in the October 2005 convertible debt issue converted $22,500 of the 8% Convertible Notes due October 18, 2007.  In exchange, the Company issued 50,000 shares of common stock.  The conversion price was $0.45 per share.

 

On July 1, 2007, issued 15,000 shares of common stock for Directors of the Company.

 

20

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Airtrax, Inc.

Notes to the Financial Statements

September 30, 2007

(unaudited)

 

On July 7, 2007 issued 147,059 shares of common stock in lieu of $50,000 in service agreement fees with an investor relations firm.

On August 21, 2007 and September 4, 2007, issued 100,000 and 50,000 shares of common stock, respectively, of the Company upon conversion of an aggregate of $67,500 of convertible notes related to the October 2005 convertible debt issuance. The conversion price was $.45 per share. In addition, the remaining October 2005 convertible notes due October 18, 2007, aggregating $1,325,500 plus accrued interest, was automatically extended to a new maturity date of April 18, 2008 as a result of the terms of the original agreement which states that the maturity date of the convertible notes is automatically extended if the trading value of the Common Stock of the Company is trading at a closing bid of less than $2.00 per share.

On August 26, 2007, 200,000 warrants were issued with a five year life at an exercise price of $1.00.

On September 10, 2007, the Company issued 123,371 shares of its common stock in connection with the terms of the November 2004 equity issuance and the “most favored nations conversion pricing related to the February 2005 convertible note issuance. In connection with the November 2004 issuance, the Company may be obligated to issue up to an additional 1.2 million shares of common stock to shareholder’s of record who received the shares under the original November 2004 issuance, due to the reduction in the conversion price of certain convertible debt issued in February 2007.  In November 2007, 817,093 shares of common stock were issued based on the supported claims for certain shareholders.

The October 2005 convertible debt issuance contains a provision that automatically extends the term of the note six months until April 18, 2008 if the Company’s common stock is trading at a closing bid price of less than $2.00 on the maturity date.  The maturity date was October 18, 2007 and Company’s common stock price on October 18, 2007 was $0.24. As such, the October 2005 Note was extended on October 18, 2007 until April 18, 2008.

On January 11, 2008, Peter Amico, Jr. resigned as a Director of the Company as noted in the Form 8-K filing with the SEC.

On January 25, 2008, the Company issued 50,000 shares of common stock to a holder of the October 2005 debt issuance for $22,500 of principal.  The conversion price was $0.45 per share.

 

On January 28, 2008, the Company issued 100,000 shares of common stock to a Director as payment of prior board fees.

 

On January 31, 2008, the Company issued to the holder of the July 26, 2006 convertible note, 100,000 shares of common stock as consideration for four months interest that was in arrears.

 

On Feb 8, 2008, the Company issued 160,000 shares of common stock to eight Directors as payment of board fees for 2008.

 

On Feb 8, 2008, the Company issued 1,021,705 shares of common stock to holders of the October 2005 debt issuance for $395,000 of principal and $64,767  of accrued interest. The conversion price was $0.45 per share.

NOTE 5- SUPPLEMENTAL CASH FLOWS INFORMATION:

There were no taxes paid during the nine month periods ended September 30, 2007 and September 30, 2006.

Interest of $ 49,483 and $ 0 was paid during the nine month periods ended September 30, 2007 and September 30, 2006, respectively.

 

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Airtrax, Inc.

Notes to the Financial Statements

September 30, 2007

(unaudited)

NOTE 6- GOING CONCERN

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern.  As shown in the financial statements, the Company had a working capital deficiency and an accumulated deficit as of September 30, 2007 and has experienced continuing losses.  These factors raise substantial doubt about the ability of the Company to continue as a going concern.  The financial statements do not include adjustments relating to the recoverability of assets and classification of liabilities that might be necessary should the Company be unable to continue in operation.  The Company’s present plans, the realization of which cannot be assured, to overcome these difficulties include, but are not limited to, the continuing effort to raise capital in the public and private markets.

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ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Special Note on Forward-Looking Statements. Certain statements in “Management’s Discussion and Analysis or Plan of Operation” below, and elsewhere in this annual report, are not related to historical results, and are forward-looking statements. Forward-looking statements present our expectations or forecasts of future events. You can identify these statements by the fact that they do not relate strictly to historical or current facts. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. Forward-looking statements frequently are accompanied by such words such as “may,” “will,” “should,” “could,” “expects,” “plans,” “intends,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue,” or the negative of such terms or other words and terms of similar meaning. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, achievements, or timeliness of such results. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of such forward-looking statements. We are under no duty to update any of the forward-looking statements after the date of this annual report. Subsequent written and oral forward looking statements attributable to us or to persons acting in our behalf are expressly qualified in their entirety by the cautionary statements and risk factors set forth below and elsewhere in this annual report, and in other reports filed by us with the SEC.

 

You should read the following description of our financial condition and results of operations in conjunction with the financial statements and accompanying notes included in this report beginning on page F-1.

 

Overview

  

Since 1995, substantially all of our resources and operations have been directed towards the development of the Omni-Directional wheel, related components, Omni-Directional Lift Trucks and other Omni-Directional Vehicles. Many of the components, including the unique shaped wheels, motors, and frames, have been designed by Airtrax and are specially manufactured for us.

 

Omni-Directional means that vehicles designed and built by us can travel in any direction. Our Omni-directional vehicles are controlled with a joystick. The vehicle will travel in the direction the joystick is pushed. If the operator pushes the joystick sideways, the vehicle will travel sideways. If the operator were to twist the joystick the vehicle will travel in circles. Our omni-directional vehicles have one motor and one motor controller for each wheel. The omni-directional movement is caused by coordinating the speed and direction of each motor with joystick inputs which are routed to a micro-processor, then from the micro-processor to the motor controllers and finally to the motor itself.

 

During the year ended December 31, 2006 and into 2007, we continued development of the COBRA and KING COBRA scissor lifts and the Omni-Directional power chair. We anticipate incurring more costs on these products and plan to begin production of the first COBRA and the KING COBRA models in 2007. The growth and development of our business will require a significant amount of additional working capital. We currently have limited financial resources and based on our current operating plan, we will need to raise additional capital in order to continue operations. However, we are in discussions with lenders to raise capital in order to continue operating. We currently do not have adequate cash to meet our short or long term objectives. In the event additional capital is raised, it may have a dilutive effect on our existing stockholders. There can be no assurance that additional financing will be available at terms that are suitable to us.

 

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We have incurred losses and experienced negative operating cash flows since our inception. For the twelve-month periods ended December 31, 2006 and 2005, we had net losses attributable to common shareholders of approximately $ 6. 2 million and $ 11.7 million, respectively. The net loss in both periods includes expenses related to the accounting for and the write-down of the previous advances to Filco of $2.0 million in 2006 and $4.7 million in 2005 .  We expect to continue to incur significant expenses.  Our operating expenses have been and are expected to continue to outpace revenue and result in additional losses in the near term. We may never be able to reduce these losses, which will require us to seek additional debt or equity financing. While we are in discussions with several prospective lenders, we do not currently have commitments for these funds and there can be no assurance that additional financing will be available, or if available, will be on acceptable terms. 

 

Results of Operations for the three months ended September 30, 2007 and 2006

Liquidity constraints and limited access to additional capital for production in 2005 and 2006 and the unexpected death of our Chief Executive Officer and President, Peter Amico in August 2006 have limited production and sales of omni-directional technology. Consequently, management believes that the year-to-year comparisons described below are not indicative of future year-to-year comparative results.

In September 2006, Airtrax was awarded a $415,000 contract to design and build a customized MP2 Equipment Handling Unit for the Israeli Air Force. The contract includes an option to build five additional units at $95,000 each upon the acceptance of the first unit. It is estimated that the follow on orders that could result from this contract will be four units over the next one to two years for a total of 10 units delivered.  The Critical Design Review was completed in November 2006, the design was approved and initial deliverables were provided.  As a result, we received a first process payment of $170,000 on December 12 2006.  We completed the Acceptance Test Procedure in mid April 2007 and received a second payment of $162,000.  We cannot predict whether we will be able to successfully pass all of the acceptance tests and complete the contract, or that if we do so, that any subsequent orders will result.

We believe that the joint cooperation between us and the United States Navy with the MP2 weapons handler contract, and our contract to design and build a customized MP2 Equipment Handling Unit for the Israeli Air Force has bolstered the potential use of our technology within the military.

 

Revenue

 

 Revenue for the three-month period ended September 30, 2007 was approximately $269,022, representing an increase of approximately $269,022 as no revenues were generated for the three-month period ended September 30, 2006.  This increase in revenue, is primarily, attributed to revenue recorded in connection with the development of the MP2 Equipment Handling Unit for the Israeli Air Force.

 

Cost of Goods Sold

 

Our cost of goods sold for the three-month period ended September 30, 2007 amounted to approximately $204,496, an increase of the full amount as no costs were recorded for the three-month period ended September 30, 2006.  This increase in cost of goods sold is primarily attributed to continued development cost in connection with the MP2 Equipment Handling Unit for the Israeli Air Force

 

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