UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended JUNE 30, 2009
[ ] Transition Report pursuant to 13 or 15(d) of the Securities Exchange Act
of 1934
For the transition period ____________ to ____________
Commission File Number 000-21391
TURBODYNE TECHNOLOGIES, INC.
(Exact name of small business issuer as specified in its charter)
NEVADA 95-4699061
------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
888 SEVENTH AVENUE, 17TH FLOOR, NEW YORK, NY 10106
-------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (805) 512-9511
--------------
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NOT APPLICABLE
(Former name, former address and former fiscal year end,
if changed since last report)
Indicate by checkmark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (ss.232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). [ ] Yes [X] No
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer' and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ]
Accelerated filer [ ]
Non -accelerated filer [ ] (do not check if a smaller reporting company)
Smaller reporting company [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act) [ ] Yes [X] No
State the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date: 550,513,491 shares of common stock
issued and outstanding as of AUGUST 12, 2009.
TURBODYNE TECHNOLOGIES, INC.
INDEX TO FORM 10-Q
JUNE 30, 2009
PAGE
NUMBER
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of June 30, 2009
and December 31, 2008 4
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Condensed Consolidated Statements of Operations for the
three and six month periods ended June 30, 2009 and
June 30, 2008 5
Condensed Consolidated Statements of Cash Flows for the six
month periods ended June 30, 2009 and June 30, 2008 6
Notes to the Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis or Plan of Operations 23
Item 3. Quantitative and Qualitative Disclosures About Market Risk NA
Item 4. Controls and Procedures 30
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 33
Item 1A. Risk Factors NA
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 33
Item 3. Defaults Upon Senior Securities NA
Item 4. Submission of Matters to a Vote of Security Holders NA
Item 5. Other Information 33
Item 6. Exhibits 34
SIGNATURES 35
2
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED
JUNE 30, 2009 AND 2008
(UNAUDITED - EXPRESSED IN US DOLLARS)
3
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(EXPRESSED IN US DOLLARS)
JUNE 30 DECEMBER 31
2009 2008
-------------------------------------------------------------------------------------------------
ASSETS (UNAUDITED)
CURRENT
Cash $ 29,121 $ 68
------------------------------
TOTAL CURRENT ASSETS 29,121 68
PROPERTY AND EQUIPMENT, net 14,825 17,829
------------------------------
TOTAL ASSETS $ 43,946 $ 17,897
=================================================================================================
LIABILITIES AND STOCKHOLDERS' DEFICIT
LIABILITIES
CURRENT
Accounts payable $ 1,916,303 $ 1,869,757
Accrued liabilities 334,424 320,000
Provision for lawsuit settlements (Note 5) 5,538,129 5,345,113
Loans payable (Note 3) 529,501 508,227
------------------------------
TOTAL CURRENT LIABILITIES 8,318,357 8,043,097
------------------------------
LONG-TERM
Loans payable (Note 4) 121,750 --
Deferred licensing fee 263,718 274,830
------------------------------
TOTAL LONG-TERM LIABILITIES 385,468 274,830
------------------------------
TOTAL LIABILITIES 8,703,825 8,317,927
------------------------------
STOCKHOLDERS' DEFICIT
Share Capital (Note 2)
Authorized
1,000,000 preferred shares, par value $0.001
1,000,000,000 common shares, par value $0.001
Issued
12,675 preferred shares in 2009 and 2008 12 12
550,513,491 common shares in 2009 and 549,513,491 2008 550,514 549,514
Treasury stock, at cost (5,278,580 shares) (1,963,612) (1,963,612)
Additional paid-in capital 127,944,545 127,897,291
Other comprehensive income -
Foreign exchange translation gain 35,119 35,119
Accumulated deficit (135,226,457) (134,818,354)
------------------------------
TOTAL STOCKHOLDERS' DEFICIT (8,659,879) (8,300,030)
------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 43,946 $ 17,897
=================================================================================================
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The accompanying notes are an integral part of these unaudited
consolidated financial statements.
4
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED - EXPRESSED IN US DOLLARS)
THREE-MONTH SIX-MONTH
PERIODS ENDED PERIODS ENDED
JUNE 30 JUNE 30
2009 2008 2009 2008
----------------------------------------------------------------------------------------------------------------------
REVENUE
Licensing fees
$ 5,556 $ 5,556 $ 11,112 $ 11,112
------------------------------------------------------------------------
TOTAL REVENUE 5,556 5,556 11,112 11,112
------------------------------------------------------------------------
EXPENSES
General and administrative 94,003 174,508 192,132 430,356
Research and development 48,221 92,362 74,029 202,920
Litigation expense 96,508 98,330 193,016 180,395
Depreciation and amortization 1,502 890 3,004 1,780
------------------------------------------------------------------------
TOTAL EXPENSES 240,234 366,090 462,181 815,451
------------------------------------------------------------------------
LOSS FROM OPERATIONS (234,678) (360,534) (451,069) (804,339)
OTHER INCOME (EXPENSES)
Interest expense (13,761) (35,602) (23,060) (57,632)
Amortization of discount on
convertible notes (2,884) (94,382) (2,884) (334,576)
Debt conversion expense -- (729,600) -- (1,156,457)
Gain on extinguishment of debt 70,510 -- 70,510 --
------------------------------------------------------------------------
LOSS BEFORE TAXES (180,813) (1,220,118) (406,503) (2,353,004)
INCOME TAX EXPENSE -- -- (1,600) (1,600)
------------------------------------------------------------------------
NET LOSS FOR THE PERIOD $ (180,813) $ (1,220,118) $ (408,103) $ (2,354,604)
========================================================================
Loss per common share
BASIC AND DILUTED $ (0.00) $ (0.00) $ (0.00) $ (0.00)
======================================================================================================================
WEIGHTED AVERAGE SHARES - BASIC AND DILUTED 550,513,491 439,581,259 550,513,491 417,896,030
======================================================================================================================
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The accompanying notes are an integral part of these unaudited
consolidated financial statements.
5
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED - EXPRESSED IN US DOLLARS)
FOR THE SIX-MONTH PERIODS ENDED JUNE 30 2009 2008
-----------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net loss for the period $ (408,103) $ (2,354,604)
----------------------------
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Amortization of deferred licensing fees (11,112) (11,112)
Depreciation and amortization 3,004 1,780
Amortization of discount on convertible debt (Note 3 & 4) 2,884 334,576
Stock for services 3,444 189,444
Debt conversion expense (Note 3) -- 1,156,457
Warrant compensation (Note 2) 11,890 95,584
(Increase) decrease in operating assets
Prepaid expenses and other current assets -- --
Increase (decrease) in operating liabilities
Accounts payable 46,546 89,613
Accrued liabilities and provision for lawsuit settlements 230,500 276,307
----------------------------
Net cash used in operating activities (120,947) (221,955)
----------------------------
FINANCING ACTIVITIES
Notes payable 150,000 323,500
----------------------------
Net cash provided by financing activities 150,000 323,500
----------------------------
NET INCREASE (DECREASE) IN CASH 29,053 101,545
CASH, beginning of period 68 2,786
----------------------------
CASH, end of period $ 29,121 $ 104,331
===============================================================================================
SUPPLEMENTARY DISCLOSURE OF NON-CASH INFORMATION
BENEFICIAL CONVERSION FEATURE OF CONVERTIBLE DEBT $ -- $ 122,250
VALUE OF WARRANTS ISSUED WITH CONVERTIBLE DEBT 34,257 72,250
CONVERSION OF INTEREST AND NOTES PAYABLE TO COMMON STOCK -- 622,020
===============================================================================================
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The accompanying notes are an integral part of these unaudited
consolidated financial statements.
6
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited - Expressed in US Dollars)
JUNE 30, 2009 AND 2008
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Turbodyne Technologies, Inc., a Nevada corporation, and its subsidiaries
(the "Company") engineer, develop and market products designed to enhance
performance and reduce emissions of internal combustion engines.
The Company's operations have been financed principally through a
combination of private and public sales of equity and debt securities. If
the Company is unable to raise equity capital or generate revenue to meet
its working capital needs, it may have to cease operating and seek relief
under appropriate statutes. These consolidated financial statements have
been prepared on the basis that the Company will be able to continue as a
going concern and realize its assets and satisfy its liabilities and
commitments in the normal course of business and do not reflect any
adjustment which would be necessary if the Company is unable to continue
as a going concern.
GOING CONCERN
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. The Company
has suffered net operating losses in recent periods, has an accumulated
deficit of $135,226,457 at June 30, 2009 and a total capital deficit of
$8,659,879 at June 30, 2009. It has used most of its available cash in its
operating activities in recent years, has a significant working capital
deficiency and is subject to lawsuits brought against it by other parties.
These matters raise substantial doubt about the Company's ability to
continue as a going concern.
BASIS OF PRESENTATION
The interim financial statements included herein, presented in accordance
with United States generally accepted accounting principles and stated in
US dollars, have been prepared by the Company, without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission and
with the instruction to Form 10-Q and Rule 8-03 of Regulation S-X. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are
adequate to make the information presented not misleading.
These financial statements reflect all adjustments, consisting of normal
recurring adjustments, which in the opinion of management are necessary
for fair presentation of the information contained therein. It is
suggested that these interim financial statements be read in conjunction
with the audited financial statements of the Company for the years ended
December 31, 2008 and 2007 included in the Company's 10-K Annual Report.
The Company follows the same accounting policies in the preparation of
interim reports.
Results of operations for the interim periods are not indicative of annual
results.
7
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(UNAUDITED - EXPRESSED IN US DOLLARS)
JUNE 30, 2009 AND 2008
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
CONTINUED
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements, stated in United
States dollars, include the accounts of Turbodyne Technologies, Inc. and
its wholly-owned subsidiaries, Turbodyne Systems, Inc., Turbodyne Germany
Ltd., Electronic Boosting Systems, Inc. and Pacific Baja Light Metals
Corp. ("Pacific Baja"). All intercompany accounts and transactions have
been eliminated on consolidation.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization of property and equipment is computed using
the straight-line method over estimated useful lives as follows:
Computers and measurement equipment - 3 years
Machinery and equipment - 7 to 15 years
Furniture and fixtures - 5 to 10 years
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VALUATION OF LONG-LIVED ASSETS
The Company periodically and at least, annually, reviews the carrying
value of long-lived assets for indications of impairment in value and
recognizes impairment of long-lived assets in the event the net book value
of such assets exceeds the estimated undiscounted future cash flows
attributable to such assets. Long-lived assets to be disposed of by sale
are to be measured at the lower of carrying amount or fair value less cost
of sale whether reported in continuing operations or in discontinued
operations. No impairment was required to be recognized during 2009 and
2008.
8
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(UNAUDITED - EXPRESSED IN US DOLLARS)
JUNE 30, 2009 AND 2008
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
CONTINUED
FAIR VALUE MEASUREMENTS
Fair value is defined as the exchange price that would be received for an
asset or paid to transfer a liability (an exit price) in the principal or
most advantageous market for the asset or liability in an orderly
transaction between market participants at the measurement date. The
Company reports assets and liabilities that are measured at fair value
using a three-level fair value hierarchy that prioritizes the inputs used
to measure fair value. This hierarchy maximizes the use of observable
inputs and minimizes the use of unobservable inputs. The three levels of
inputs used to measure fair value are as follows:
o Level 1 - Quoted prices in active markets for identical assets or
liabilities.
o Level 2 - Observable inputs other than quoted prices included in
Level 1, such as quoted prices for similar assets and liabilities in
active markets; quoted prices for identical or similar assets and
liabilities in markets that are not active; or other inputs that are
observable or can be corroborated by observable market data.
o Level 3 - Unobservable inputs that are supported by little or no
market activity and that are significant to the fair value of the
assets or liabilities. This includes certain pricing models,
discounted cash flow methodologies and similar techniques that use
significant unobservable inputs.
An asset's or liability's level within the fair value hierarchy is based
on the lowest level of any input that is significant to the fair value
measurement. At each reporting period, we perform a detailed analysis of
our assets and liabilities that are measured at fair value. All assets and
liabilities for which the fair value measurement is based on significant
unobservable inputs or instruments which trade infrequently and therefore
have little or no price transparency are classified as Level 3.
All financial liabilities that are measured at fair value have been
segregated into the most appropriate level within the fair value hierarchy
based on the inputs used to determine the fair value at the measurement
date in the table below. The Company has no financial assets and
non-financial assets and liabilities that are measured at fair value.
As of June 30, 2009, financial liabilities subject to fair value
measurements were as follows:
Total Level 1 Level 2 Level 3
---------------------------------------
Liabilities:
Conversion option liabilities $651,251 $651,251
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9
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(UNAUDITED - EXPRESSED IN US DOLLARS)
JUNE 30, 2009 AND 2008
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
CONTINUED
RECOGNITION OF REVENUE
License fee revenue is recognized over the term of the license agreement.
During the year ended December 31, 2003, $400,000 in license fees were
deferred and are being amortized over 18 years. As a result, for the six
months ended June 30, 2009 $11,112 ($11,112 in 2008) of licensing fees was
recognized as income.
EARNINGS (LOSS) PER SHARE
Earnings (loss) per share is computed in accordance with SFAS No. 128,
"Earnings Per Share". Basic earnings (loss) per share is calculated by
dividing the net income (loss) available to common stockholders by the
weighted average number of shares outstanding during the year. Diluted
earnings per share reflect the potential dilution of securities that could
share in earnings of an entity. In a loss year, dilutive common equivalent
shares are excluded from the loss per share calculation as the effect
would be anti-dilutive.
For the quarter ended June 30, 2009, 12,675 preferred shares convertible
into 1,267,500 shares of common stock and options and warrants to purchase
17,599,000 and 49,386,655 shares of common stock, convertible notes to
purchase 28,785,515 shares of common stock were outstanding during the
period. The weighted average cumulative equivalent shares of 550,513,491
were included in the denominator for 2009 computation of diluted earnings
(loss) per share. No other adjustments were made for purposes of per share
calculations.
For the quarter ended June 30, 2008, 12,675 preferred shares convertible
into 1,267,500 shares of common stock and options and warrants to purchase
18,022,000 and 41,186,663 shares of common stock, convertible notes to
purchase 16,325,991 shares of common stock were outstanding during the
period. The weighted average cumulative equivalent shares of 439,581,259
were included in the denominator for 2009 computation of diluted earnings
(loss) per share. No other adjustments were made for purposes of per share
calculations.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
the 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. Actual results could differ from those
estimates.
10
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(UNAUDITED - EXPRESSED IN US DOLLARS)
JUNE 30, 2009 AND 2008
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
CONTINUED
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation under the fair value
method in accordance with Statement of Financial Accounting Standards
No.123 (revised 2004), "Share Based Payment" "SFAS 123(R)". SFAS No. 123R
requires the Company to establish assumptions and estimates of the
weighted-average fair value of stock options granted, as well as using a
valuation model to calculate the fair value of stock-based awards. The
Company uses the Black-Scholes option-pricing model to determine the
fair-value of stock-based awards. All options are amortized over the
requisite service periods of the awards, which are generally the vesting
periods.
RESEARCH AND DEVELOPMENT
Research and development costs related to present and future products are
charged to operations in the period incurred. Previously, research
prototypes were sold and proceeds reflected by reductions in our research
and development costs. As new technology pre-production manufacturing
units are produced and related non-recurring engineer services are
delivered we will recognize the sales proceeds as revenue.
INCOME TAXES
The Company accounts for income taxes under the asset and liability method
of accounting for income taxes, which recognizes deferred tax assets and
liabilities for the estimated future tax consequences attributable to
differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates in effect for the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the
enactment date. The components of the deferred tax assets and liabilities
are classified as current and non-current based on their characteristics.
The components of the deferred tax assets and liabilities are classified
as current and non-current based on their characteristics. A valuation
allowance is provided for certain deferred tax assets if it is more likely
than not that the Company will not realize tax assets through future
operations.
LEGAL FEES
The Company expenses legal fees in connection with litigation as incurred.
11
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(UNAUDITED - EXPRESSED IN US DOLLARS)
JUNE 30, 2009 AND 2008
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
CONTINUED
COMPREHENSIVE INCOME
The Company has adopted SFAS No. 130, "Reporting Comprehensive Income".
SFAS No. 130 establishes standards to measure all changes in equity that
result from transactions and other economic events other than transactions
with owners. Comprehensive income is the total of net earnings (loss) and
all other non-owner changes in equity. Except for net earnings (loss) and
foreign currency translation adjustments, the Company does not have any
transactions and other economic events that qualify as comprehensive
income as defined under SFAS No. 130. As foreign currency translation
adjustments were immaterial to the Company's consolidated financial
statements, net earnings (loss) approximated comprehensive income for the
quarter ended June 30, 2009 and 2008.
NEW ACCOUNTING PRONOUNCEMENTS
In April 2009, the FASB issued FASB Staff Position (FSP) No. FAS 115-2 and
FAS 124-2, "Recognition and Presentation of Other-Than-Temporary
Impairments," to determine whether the holder of an investment in a debt
or equity security for which changes in fair value are not regularly
recognized in earnings (such as securities classified as held-to-maturity
or available-for-sale) should recognize a loss in earnings when the
investment is impaired. FSP No. FAS 115-2 and FAS 124-2 improve the
presentation and disclosure of other-than-temporary impairments on debt
and equity securities in the financial statements. The effective date for
interim and annual reporting periods ending after June 15, 2009, with
early adoption permitted for periods ending after March 15, 2009. Earlier
adoption for periods ending before March 15, 2009, is not permitted. The
adoption of this FSP did not have an impact on the Company's financial
statements.
12
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(UNAUDITED - EXPRESSED IN US DOLLARS)
JUNE 30, 2009 AND 2008
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
CONTINUED
NEW ACCOUNTING PRONOUNCEMENTS
In May 2009, the FASB issued SFAS No. 165, "Subsequent Events," which
requires entities to disclose the date through which they have evaluated
subsequent events and whether the date corresponds with the release of
their financial statements. The statement establishes general standards of
accounting for and disclosure of events that occur after the balance sheet
date but before financial statements are issued or are available to be
issued. SFAS No. 165 is effective for interim or annual financial periods
ending after June 15, 2009, and shall be applied prospectively. The
adoption of SFAS No. 165 did not have a material impact on the Company's
consolidated financial statements.
In June 2009, the FASB issued SFAS No. 166, "Accounting for Transfers of
Financial Assets," which is an amendment of SFAS No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities," requires entities to provide more information about sales of
securitized financial assets and similar transactions, particularly if the
seller retains some risk to the assets. This statement will improve the
relevance, representation faithfulness, and comparability of the
information that a reporting entity provides in its financial statements
about a transfer of financial assets. It will also take into account the
effects of a transfer on its financial position, financial performance,
and cash flows, and a transferor's continuing involvement. SFAS No. 166 is
effective for annual periods beginning after November 15, 2009. This
statement is effective for the Company beginning January 1, 2010 and is
expected to have no material impact on the financial statements.
In June 2009, the FASB issued SFAS No. 167, "Amendments to FASB
interpretation No. 46(R)," establishes how a company determines when an
entity that is insufficiently capitalized or not controlled through voting
should be consolidated. This statement improves financial reporting by
enterprises involved with variable interest entities, which addresses the
effects on certain provisions of FASB interpretation No. 46,
"Consolidation of Variable Interest Entities," as a result of the
elimination of the qualifying special-purpose entity concept in FASB No.
166, "Accounting for Transfers of Financial Assets," and constituent
concerns about the application of certain key provisions of Interpretation
46(R). SFAS No. 167 is effective after November 15, 2009. This statement
is effective for the Company beginning January 1, 2010 and is expected to
have no material impact on the financial statements.
In June 2009, the FASB issued SFAS No. 168, "The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting
Principles," Replaces SFAS No. 162, establishes the source of
authoritative U.S. generally accepted accounting principles (GAAP)
recognized by the FASB to be applied by nongovernmental entities. On the
effective date for financial statements issued for interim and annual
periods ending after September 15, 2009, the Codification will supersede
all then- existing non-SEC accounting and reporting standards. The Company
has determined that the adoption of SFAS No. 168 will not have an impact
on the financial statements.
13
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(UNAUDITED - EXPRESSED IN US DOLLARS)
JUNE 30, 2009 AND 2008
2. SHARE CAPITAL
Transactions not disclosed elsewhere in these consolidated interim
financial statements are as follows:
a) Authorized Capital
At the Annual General Meeting held on June 30, 2004, the
shareholders approved an increase of authorized capital to
1,000,000,000 common shares.
In 2003, 150,000 of the 1 million preferred shares were designated
as Series X preferred shares. These shares have a par value of
$0.001 per share with each share being convertible into 100 common
shares at the discretion of the holder. As of June 30, 2009, 12,675
of Series X preferred shares convertible into 1,267,500 common
shares are outstanding.
In addition to outstanding shares of common stock, options and
warrants described in these notes; additional shares are issuable in
connection with the change of control transaction in September 2005
in the event the Company issues any securities directly or
indirectly related to pre-merger events.
b) During the six months ended June 30, 2009 the Company issued
1,000,000 shares of common stock for payment of services.
During the six months ended June 30, 2008 the Company issued
89,113,612 shares of common stock, 83,113,612 for conversion of
notes and interest payable and 6,000,000 for payment of services.
c) Stock Options
The determination of fair value of share-based payment awards to
employees, directors and non-employees on the date of grant using
the Black-Scholes model is affected by the Company's stock price as
well as assumptions regarding a number of highly complex and
subjective variables. These variables include, but are not limited
to the expected stock price volatility over the term of the awards,
and actual and projected employee stock option exercise behaviours.
Management has used historical data to estimate forfeitures. The
risk-free rate is based on U.S. Treasury rates in effect during the
corresponding period of grant. The expected volatility is based on
the historical volatility of the Company's stock price.
14
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(UNAUDITED - EXPRESSED IN US DOLLARS)
JUNE 30, 2009 AND 2008
2. SHARE CAPITAL - CONTINUED
c) Stock Options - Continued
Grant of Stock Options to Non-employees for Services
During 2006 and 2007, we granted warrants to purchase 78,200,000
shares of our common stock to various consultants that we deemed
essential to our operations. Details of the consultant warrants for
the quarter ended June 30, 2009 are as follows:
Total consultant warrants granted 78,200,000
Vested prior to January 1, 2009 (22,805,549)
Vested January through June 30, 2009 (2,461,106)
Cancelled January through December 2008 (22,044,436)
-----------
Warrants not vested 30,888,909
===========
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During the six months ended June 30, 2009 the Company using the
Black-Scholes model recorded $11,890 ($95,584 in 2008) of
compensation expense, relating to the vesting of stock warrants
previously issued to non-employees for services. The non cash
warrant expense is allocated with $10,082 ($66,387 in 2008) to
general and administrative expenses and $1,808 ($29,197 in 2008) to
research and development.
The estimated fair value of warrants issued to non-employees during
the six months ended June 30, 2009 ranged from $0.0032 to $0.0062.
Assumptions used to value the warrants: expected dividend yield
Nil%; expected volatility of 113.23%, 113.72%, 125.53 and 139.34%;
risk-free interest rate of 2.27%, 2.28%, 2.69%, 2.70%, 3.06% and
3.19% and an expected life of 7 years.
d) Stock Purchase Warrants
At June 30, 2009 the Company had 49,386,655 share purchase warrants
outstanding and exercisable. These warrants were issued in
connection with private placements, non-employee compensation and
other means of financing. The holders of these warrants are entitled
to receive one share of common stock of the Company for one warrant
exercised. The warrants have exercise prices ranging from $0.01 to
$0.04 per share with a weighted average exercise price of $0.016 per
share and expiration dates between 2011 and 2016. Details of share
purchase warrants for the quarter ended June 30, 2009 are as
follows:
15
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED - EXPRESSED IN US DOLLARS)
JUNE 30, 2009 AND 2008
2. SHARE CAPITAL - CONTINUED
INVESTORS EMPLOYEES & CONSULTANTS TOTAL
------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
WARRANTS PRICE WARRANTS PRICE WARRANTS PRICE
------------------------------------------------------------------
Outstanding at beginning
of period 21,120,000 $0.02 22,805,549 $0.01 43,925,549 $0.02
Vested 3,000,000 $0.01 2,461,106 $0.01 5,461,106 $0.01
---------- ---------- ----------
Warrants outstanding
and exercisable at end
of period 24,120,000 $0.02 25,266,655 $0.01 49,386,655 $0.02
========== ========== ==========
Weighted average fair
value of warrants granted
during the period -- -- $0.01 $0.01
==================================================================
|
At June 30, 2009, the following is a summary of share purchase warrants
outstanding and exercisable:
Weighted-
Average Weighted
Remaining Average
Contractual Exercise
Exercise Price Number Life (Years) Price
----------------------------------------------------------------
$0.01 27,433,327 5.21 $0.01
$0.025 - 0.04 21,953,328 3.21 0.02
------------
49,386,655 4.32 $0.02
============
3. CURRENT LOANS PAYABLE
June 30, December 31,
2009 2008
-----------------------
Unsecured, non-interest bearing loan payable,
due on demand to stockholders and other parties $138,600 $138,600
Note payable, 5% per annum (see note 6) 52,054 50,905
Convertible notes payable 338,847 318,722
-----------------------
Total Current Loans Payable $529,501 $508,227
-----------------------
|
16
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED - EXPRESSED IN US DOLLARS)
JUNE 30, 2009 AND 2008
3. CURRENT LOANS PAYABLE - CONTINUED
As of June 30, 2009, convertible notes consist of:
Issued Issued Issued Issued Issued Issued
through from from from From From
Sept Nov 06 to Mar07 to Sep 07 to Jan 08 to Apr 08 to
2006 Feb 07 Aug 07 Dec 07 Mar 08 Jun 08 Total
----------------------------------------------------------------------------------------------
Proceeds from issuances of
convertible debt $ 615,000 $ 95,000 $ 441,000 $ 200,000 $ 100,000 $ 200,000 $1,651,000
Less: Debt conversions (530,000) (95,000) (441,000) (200,000) (100,000) -- (1,366,000)
----------------------------------------------------------------------------------------------
85,000 -- -- -- -- 200,000 285,000
----------------------------------------------------------------------------------------------
Discount on convertible debt
Value allocated to warrants 88,144 8,041 118,485 51,035 24,198 48,052 337,955
Beneficial conversion feature 521,756 86,959 322,515 148,965 54,198 68,052 1,202,445
----------------------------------------------------------------------------------------------
609,900 95,000 441,000 200,000 78,396 116,104 1,540,400
Accumulated amortization of
value allocated to warrants (88,144) (8,041) (118,485) (51,035) (24,198) (48,052) (337,955)
Accumulated amortization of
beneficial conversion feature (521,756) (86,959) (322,515) (148,965) (54,198) (68,052) (1,202,445)
----------------------------------------------------------------------------------------------
-- -- -- -- -- -- --
----------------------------------------------------------------------------------------------
Accrued Interest 13,947 -- -- -- -- 39,900 53,847
----------------------------------------------------------------------------------------------
Net Convertible Debt $ 98,947 $ -- $ -- $ -- $ -- $ 239,900 $ 338,847
==============================================================================================
Lower of
70% of
Original conversion price market or $ 0.005 $ 0.020 $ 0.020 $ 0.020 $ 0.020 --
$0.025
Modified conversion price $0.005 N/A N/A N/A N/A N/A --
Interest rate 5% 5% 5% 18% 18% 18% --
Maturity from date of issuance 1 year 1 year 1 year 6 months 6 months 6 months --
Warrants issued 12,300,000 1,900,000 8,820,000 4,000,000 2,000,000 4,000,000 33,020,000
Warrants exercised (11,900,000) -- -- -- -- -- (11,900,000)
----------------------------------------------------------------------------------------------
Warrants remaining 400,000 1,900,000 8,820,000 6,000,000 2,000,000 4,000,000 21,120,000
----------------------------------------------------------------------------------------------
Market value of warrants at date
of issuance $ 150,884 $ 48,863 $ 398,872 $140,612 $ 41,498 $ 69,572
Assumptions for Black-Scholes
valuation of warrants
Original exercise price $ 0.025 $ 0.025 $ 0.020 $ 0.020 $ 0.020 $ 0.020
Modified exercise price $ 0.010 N/A N/A N/A N/A N/A
Term 5 years 5 years 5 years 5 years 5 years 5 years
Volatility rate 146%-151% 153%-155% 112%-155% 112%-155% 109% 107%
Risk free interest rate 4.61%-5.02% 4.45%-4.69% 4.46%-5.01% 2.93%-5.01% 2.93% 1.90%
|
17
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED - EXPRESSED IN US DOLLARS)
JUNE 30, 2009 AND 2008
3. LOANS PAYABLE - CONTINUED
For the years ended December 31, 2008, 2007 and 2006, the Company issued
$300,000, $691,000 and $660,000, respectively, of convertible notes. All
of the convertible notes were issued with detachable warrants to purchase
6,000,000, 13,820,000, and 13,200,000 shares of the Company's common
stock, respectively. In recording the transaction, the Company allocated
the value of the proceeds to the convertible notes and the warrants based
on their relative fair values. Fair value of the warrants was determined
using the Black-Scholes valuation model. It was also determined that the
convertible notes contained a beneficial conversion feature since the fair
market value of the common stock issuable upon the conversion of the notes
exceeded the value allocated to the notes.
The value of the beneficial conversion feature and the value of the
warrants have been recorded as a discount to convertible notes and are
being amortized over the term of the notes using the straight-line method.
For the years ended December 31, 2008 and 2007, amortization of the
discount was $447,728 and $864,485, respectively. As of December 31, 2008
and 2007, the remaining balance of the beneficial conversion feature was
$-0- and $199,726, and detachable warrants was $-0- and $53,501,
respectively.
In September 2006, the Company offered to decrease the note conversion
price to $0.005 per share if the note holders exercised their warrants at
the reduced exercise price of $0.010 by September 30, 2006. 11,900,000 of
the warrants were exercised. In consideration for the reduction of
conversion price, the maturity of the notes extended for another year.
The modification of conversion terms was substantial such that it was
considered an extinguishment of debt. Accordingly, the unamortized
discount on convertible notes was written off and included in total
amortization for 2006. Conversion of notes in 2008 and 2007 also resulted
in the write off of the corresponding unamortized discount.
In addition, as a result of the inducement to exercise the warrants and to
convert the notes, the Company recognized an expense of $1,247,657 and
$988,686 for the years ended December 31, 2008 and 2007, respectively,
with a corresponding increase in additional paid-in capital.
In February 2007, the Company changed the per share conversion price from
$0.005 to $0.020 for new lenders.
The notes, issued prior to September 1, 2007, bear interest at 5% and
mature within one year from date of issuance. The notes, issued after
September 1, 2007, bear interest at 18% and mature within six months from
date of issuance. The warrants are to purchase the Company's common stock
at $0.025 per share expiring in five years.
18
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED - EXPRESSED IN US DOLLARS)
JUNE 30, 2009 AND 2008
4. LONG-TERM LOANS PAYABLE
For the quarter ended June 30, 2009, the Company issued $150,000 of
convertible notes. All of the convertible notes were issued with
detachable warrants to purchase 3,000,000 shares of the Company's common
stock. In recording the transaction, the Company allocated the value of
the proceeds to the convertible notes and the warrants based on their
relative fair values. Fair value of the warrants was determined using the
Black-Scholes valuation model. There was no beneficial conversion feature.
The Convertible Notes have a two year maturity with 12% annual interest
rate payable at maturity or at the time of conversion. The Note may be
converted at any time after issuance until the note is paid in full. The
conversion price is at a price equal to $.01; provided that Conversion
shall be subject to a minimum conversion amount of $10,000, or if less,
the remaining Outstanding Obligation. The warrants will have an exercise
price of $.01 and a 5 year expiration date.
The value of the warrants has been recorded as a discount to convertible
notes and is being amortized over the term of the notes using the
straight-line method. For the quarter ended June 30, 2009, amortization of
the discount was $1,985. As of June 30, 2009, the remaining balance of the
detachable warrants was $31,373. As of June 30, 2009 the accrued interest
on the convertible notes is $3,123.
5. COMMITMENTS AND CONTINGENCIES
The Company is party to various legal claims and lawsuits that have arisen
in the normal course of business. There have been no material changes in
the status of these matters since the issuance of the most recent audited
annual financial statements.
LITIGATION
a) TST, Inc.
In March 2000, TST, Inc. ("TST"), a vendor to a subsidiary of
Pacific Baja (Note 5(b)) filed an action against the Company
alleging that in order to induce TST to extend credit to a
subsidiary of Pacific Baja, the Company executed guarantees in favor
of TST. TST alleged that the subsidiary defaulted on the credit
facility and that the Company is liable as guarantor.
Agreed to the immediate entry of judgment against the Company in the
amount of $2,068,078 plus interest from the date of entry at the
rate of 10% per annum. The amount of this judgment would immediately
increase by any amount that TST is compelled by judgment or court
order or settlement to return as a preferential transfer in
connection with the bankruptcy proceedings of Pacific Baja; and
TST cannot execute on its judgment until Turbodyne either: (a) files
a voluntary bankruptcy case; (b) is the subject of an involuntary
case; or (c) effects an assignment for the benefit of creditors.
19
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED - EXPRESSED IN US DOLLARS)
JUNE 30, 2009 AND 2008
5. COMMITMENTS AND CONTINGENCIES - LITIGATION CONTINUED
a) TST, Inc. - Continued
Any proceeds received by TST or its president from the sale of the
issued shares will be automatically applied as a credit against the
amount of the judgment against the Company in favor of TST. Prior to
March 31, 2004, 147,000 shares issued in connection with the TST
settlement had been sold which have reduced the provision for
lawsuit settlement by $23,345.
At June 30, 2009, the Company has included $4,136,344 ($3,943,328 in 2008)
in regard to this matter in provision for lawsuit settlements. It was
determined that TST received payment in preference to other creditors
before Pacific Baja filed its Chapter 11 petition in bankruptcy. TST and
Pacific Baja settled the preference payment issue with TST paying $20,000
to Pacific Baja and TST relinquishing the right to receive $63,000
therefore; $83,000 has also been included in the provision for lawsuit
settlements.
June 30, 2009 December 31, 2008
------------------------------------
Settlement amount $2,068,079 $2,068,079
Interest 2,008,610 1,815,594
Preference payment 83,000 83,000
Proceeds of stock sale (23,345) (23,345)
---------- ----------
Total $4,136,344 $3,943,328
--------------------------------------------------------------------------------
b) Pacific Baja Bankruptcy
|
In July 1999, a major creditor of the Company's wholly-owned major
subsidiary, Pacific Baja, began collection activities against
Pacific Baja which threatened Pacific Baja's banking relationship
with, and source of financing from, Wells Fargo Bank. As a result,
Pacific Baja and its subsidiaries commenced Chapter 11 bankruptcy
proceedings on September 30, 1999.
In September 2001, the Pacific Baja Liquidating Trust (the "Trust")
commenced action against us in the aforesaid Bankruptcy Court. The
Trust was established under the Pacific Baja bankruptcy proceedings
for the benefit of the unsecured creditors of Pacific Baja.
The Company vigorously contested the Complaint until April 22, 2005
when the Company entered into a stipulation for entry of judgment
and assignment in the Pacific Baja bankruptcy proceedings for
$500,000 to be issued in common stock or cash or a combination.
Additionally the Company assigned to the bankruptcy Trust the rights
to $9,500,000 claims under any applicable directors and officers
liability insurance policies. The bankruptcy Trust also agreed to a
covenant not to execute against the Company regardless of the
outcome of the insurance claims.
The Company has completed the assignment of its insurance claims,
but has not completed the cash/stock payment that was to be paid to
the Trust by December 9, 2005. We are negotiating with the Trustee
regarding this default.
20
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED - EXPRESSED IN US DOLLARS)
JUNE 30, 2009 AND 2008
5. COMMITMENTS AND CONTINGENCIES - CONTINUED
c) Former Director
A former director of Turbodyne, Erwin Kramer (the "Plaintiff"),
represented by his attorney Claus Schmidt, a former attorney of
Turbodyne at the time of the alleged claim, filed a legal action in
Germany against Turbodyne, our non-operating subsidiary Turbodyne
Europe GmbH ("Turbodyne GmbH"), and ex-employees of Turbodyne GmbH,
Peter Kitzinski and Marcus Kumbrick (collectively the "Defendants"),
with the Regional Frankfurt court (the "German Court") in September,
2004. The Plaintiff claims damages of Euro 245,620 plus 5% interest
per annum against the Defendants in respect of actions taken by the
Defendants while employed with Turbodyne GmbH.
On September 9, 2004, the German Court, on a motion by the
Defendants to the suit, dismissed the Plaintiff's claims against
Peter Kitzinski and Marcus Kumbrick, and ordered that Turbodyne's
patents in Munich be attached pending the resolution of the
Plaintiff's claim against Turbodyne and Turbodyne GmbH. On June 13,
2005 the Court in Frankfurt dismissed the claim. The Plaintiff filed
an appeal against this judgment with the Higher Regional Court in
Frankfurt.
The Plaintiff's attorney, Claus Schmidt, also filed similar suits on
behalf of Frank Walter and Herbert Taeuber. The German courts are
indicating that all three suits need to be filed in the United
States not Germany. Presently the suits have not been filed in the
United States. We vigorously dispute this claim and have retained
German counsel to defend it and seek its dismissal. At June 30,
2009, the Company has included $405,785 in regard to this matter in
the provision for lawsuit settlements.
d) Crescent Fund, LLC
A former consultant brought an action against the Company in the
Supreme Court of the State of New York for the County of New York
for an action entitled CRESCENT FUND, LLC v TURBODYNE TECHNOLOGIES,
INC. The action sought $300,000 damages based upon claims for
alleged breaches of contract and covenants of good faith and fair
dealing allegedly arising because the Company failed to give
plaintiff an opinion to sell the 5,000,000 shares of the Company's
common stock received for services. The Company in the action sought
the return of such shares and damages based upon plaintiff's breach
and fraud based upon the failure to perform any of the duties and
obligations required of it under the aforesaid contract which was
fraudulently induced. The Company did not anticipate any liability
and therefore did not include an amount in the provision for lawsuit
settlements. The action has been settled pursuant to which the
plaintiff retained a majority of the shares and released the Company
from all liability with any payments.
e) Other
The Company is currently involved in various collection claims and
other legal actions. It is not possible at this time to predict the
outcome of the legal actions.
21
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED - EXPRESSED IN US DOLLARS)
JUNE 30, 2009 AND 2008
6. RELATED PARTY TRANSACTIONS
Aspatuck Holdings Ltd. and another entity affiliated with Jason Meyers
have advanced an aggregate of $ 46,000 to the Company plus related
interest expense of $6,054 for 2009 and $4,904 for 2008. The advances are
repayable on demand and bear interest at 5 % per annum. See Note 3 Loan
Payable. As of June 30, 2009 and December 31, 2008 the Company also owes
Aspatuck Holdings Ltd consulting fees of $357,227 and $344,827,
respectively, for the services of Jason Meyers. The Company has included
these consulting fees in accounts payable in the balance sheet. The
Company has included $30,000 of consulting compensation in the general and
administrative expense for the quarters ended June 30, 2009 and 2008. The
Company also included $7,755 and $44,853 of non cash warrant expense for
the quarter ended June 30, 2009 and 2008 respectively.
The Company has agreed to pay Aspatuck Holdings, Ltd. $64,000 of the
accounts payable owed as funds become available and then $10,000 per month
until repaid. The accounts payable is for the services of the primary
shareholder of Aspatuck, Jason Meyers.
John Adams, co-CEO has advanced an aggregate of $35,000 in convertible
notes as a private investor. The notes were due in November 2006 and July
2007 but remain unpaid as of June 30, 2009 and December 31, 2008, with
total outstanding balance of $40,981 and $40,106, respectively, which
includes accrued interest of $5,981 and $5,106, respectively. The Company
recorded $3,444 and $9,444 general and administrative expense for the
stock compensation to be issued to John Adams for the quarter ended June
30, 2009 and 2008, respectively.
On June 30, 2009 we issued a certificate for 1,000,000 restricted shares
of our common stock to John Adams for the October 2008 through June 30,
2009 representing a portion of the 12,000,000 shares of service based
stock according to the Consulting Agreement effective January 1, 2008.
As of June 30, 2009 and December 31, 2008 the Company owes Debi Kokinos,
CFO consulting fees of $65,590 and $41,830, respectively. The Company has
included these consulting fees in accounts payable in the balance sheet.
The Company has included $19,380 of consulting compensation in the general
and administrative expense for the quarters ended June 30, 2009 and 2008.
The company also included $2,327 and $13,456 of non cash warrant expense
for the quarter ended June 30, 2009 and 2008 respectively.
22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
FORWARD LOOKING STATEMENTS
The information in this discussion contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. These
forward-looking statements involve risks and uncertainties, including statements
regarding the Company's capital needs, business strategy and expectations. Any
statements contained herein that are not statements of historical facts may be
deemed to be forward-looking statements. In some cases, you can identify
forward-looking statements by terminology such as "may", "will", "should",
"expect", "plan", "intend", "anticipate", "believe", "estimate", "predict",
"potential" or "continue", the negative of such terms or other comparable
terminology. Actual events or results may differ materially. In evaluating these
statements, you should consider various factors, including the risks outlined in
the Risk Factors section below, and, from time to time, in other reports the
Company files with the SEC. These factors may cause the Company's actual results
to differ materially from any forward-looking statement. The Company disclaims
any obligation to publicly update these statements, or disclose any difference
between its actual results and those reflected in these statements. The
information constitutes forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995.
As used in this Quarterly
Report on Form 10-Q, the terms "we", "us", "our", "Turbodyne" and "our company"
mean Turbodyne Technologies, Inc., unless otherwise indicated. All dollar
amounts in this Quarterly Report on Form 10-Q are in U.S. dollars unless
otherwise stated.
We are an engineering Company and have been engaged, for over ten years, in the
design and development of forced-air induction (air-charging) technologies that
improve the performance of gas and diesel internal combustion engines. Optimum
performance of an internal combustion engine requires a proper ratio of fuel to
air. Power available from the engine is reduced when a portion of the fuel is
not used. In a wide range of gas and diesel engines additional air is needed to
achieve an optimal result. Traditional engineered solutions for this problem use
belts or exhaust gas (superchargers or turbochargers) to supply additional air
to an engine. Turbodyne, instead, uses electric motors to supply additional air.
Because an electric motor can be engaged more quickly, compared to the
mechanical delays inherent in a belt or exhaust gas device, Turbodyne's products
under development are designed to reduce this `turbolag' and otherwise adds to
the effectiveness of gas and diesel engines used in automotive, heavy vehicle,
marine, and other internal combustion installations.
23
RESULTS OF OPERATIONS
Three Months Ended June 30 Six Months Ended June 30
---------------------------------------------- ---------------------------------------------
Percentage Percentage
2009 2008 Increase 2009 2008 Increase
(Decrease) (Decrease)
---------------------------------------------- ---------------------------------------------
Total Revenue $5,556 $5,556 Nil $11,112 $11,112 Nil
Operating Expenses
($240,234) ($366,090) (34%) ($462,181) ($815,451) (43%)
---------------------------------- ----------------------------------
Net Loss from
Operations ($234,678) ($360,534) (35%) ($451,069) ($804,339) (44%)
Other Income
(Expenses) $53,865 ($859,584) (106%) $42,966 ($1,550,265) (103%)
================================== ==================================
Net (Loss) ($180,813) ($1,220,118) (85%) ($408,103) ($2,354,604) (83%)
================================== ==================================
|
NET REVENUE
Three Months Ended June 30 Six Months Ended June 30
---------------------------------------------- ---------------------------------------------
Percentage Percentage
2009 2008 Increase 2009 2008 Increase
----------------- -------------- --------------- ---------------- --------------- --------------
License Fee $5,556 $5,556 Nil $11,112 $11,112 Nil
|
We had no revenue in 2009 other than recognition of amortized license fees.
During the year ended December 31, 2003, $400,000 in license fees were deferred
and amortized over 18 years. As a result, for each of the quarters ended June
30, 2009 and 2008, $5,556 of licensing fees was recognized as income. Our
continued net losses from operations reflect our continued operating expenses
and our inability to generate revenues. We believe that we will not be able to
generate any significant revenues from TurboPac(TM)/TurboFlow(TM) until we
complete our production models and enter into commercial arrangements.
COST OF SALES
We had no sales in 2009 and 2008; therefore we did not have any costs of sales
during any portion of these years.
24
OPERATING EXPENSES
Due to a lack of funds we reduced our operations in the first and second quarter
of 2009 so that operating expenses decreased from the comparable period in 2008
by 43%. The primary components of our operating expenses are outlined in the
table below:
Three Months Ended June 30 Six Months Ended June 30
----------------------------------------- -------------------------------------------
Percentage Percentage
Increase Increase
2009 2008 (Decrease) 2009 2008 (Decrease)
----------------------------------------- -------------------------------------------
General and Administrative
Expenses
$94,003 $174,508 (46%) $192,132 $430,356 (55%)
Research and Development
Expenses $48,221 $92,362 (48%) $74,029 $202,920 (64%)
Litigation Expenses $96,508 $98,330 (2%) $193,016 $180,395 7%
|
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative costs included management compensation and overhead
and included non cash warrant and stock compensation expense amount of $10,082
and $3,444 ($31,206 and $9,444 in 2008) respectively.
RESEARCH AND DEVELOPMENT
The decrease in research and development costs in 2008 is due to decreased
spending for limited development operations due to a lack of funding and the
decrease in the non cash warrant expense amount of $1,808 compared to $39,959 in
2008 as a result of the termination of certain consulting agreements and the
decrease in the per share price of the Company's common stock. Our research and
development costs related to present and future products are charged to
operations in the period incurred. Our research and development activities
during 2009 are associated with the development of our TurboPac.
LITIGATION EXPENSE
The litigation expense is the accrued interest relating to the TST, Inc.
settlement.
25
COMPENSATION EXPENSE
Grant of Stock Options to Non-employees for Services
During 2006 and 2007, we granted warrants to purchase 78,200,000 shares of our
common stock to various consultants that we deemed essential to our operations.
Details of the consultant warrants for the year ended December 31, 2008 are as
follows:
Total consultant warrants granted 78,200,000
Vested prior to January 1, 2009 (22,805,549)
Vested January through June 30, 2009 (2,461,106)
Cancelled January through December 2008 (22,044,436)
-----------
Warrants not vested 30,888,909
===========
|
During the six months ended June 30, 2009 the Company using the Black-Scholes
model recorded $11,890 ($95,584 in 2008) of compensation expense, relating to
the vesting of stock warrants previously issued to non-employees for services.
The non cash warrant expense is allocated with $10,082 ($66,387 in 2008) to
general and administrative expenses and $1,808 ($29,197 in 2008) to research and
development.
OTHER INCOME (EXPENSE) AND INCOME TAX
Three Months Ended June 30 Six Months Ended June 30
---------------------------------------- ------------------------------------------
Percentage Percentage
Increase Increase
2009 2008 (Decrease) 2009 2008 (Decrease)
---------------------------------------- ------------------------------------------
Gain on Extinguishment
of debt $70,510 -- 100% $70,510 -- 100%
------------------------- --------------------------
OTHER EXPENSES
Interest Expense ($13,761) ($35,602) (61%) ($23,060) ($57,632) (60%)
Amortization of Discount
on Convertible Notes ($2,884) ($94,382) (97%) ($2,884) ($334,576) (99%)
Inducement Expense -- ($729,600) (100%) -- ($1,156,457) (100%)
Income Tax Expense -- -- -- ($1,600) ($1,600) Nil
-----------------------------------------------------------------------------------
Total Other Expenses ($16,645) ($859,584) (98%) ($27,544) ($1,550,265) (98%)
-----------------------------------------------------------------------------------
Other Income and Expenses $53,865 ($859,584) (106%) $42,966 ($1,550,265) (103%)
===================================================================================
|
26
The Company continues to negotiate with our creditors and trade debt holders on
settlement of accounts payable from periods prior to the current management
assuming operation of the Company. When achieved, this is represented as a debt
relief of accounts payable. For the quarter ending June 30, 2009, the Company
recorded a gain of $70,510 related to debt relief.
The Company had other expenses for the quarter ending June 30, 2009 of $15,765
compared to $859,584 in 2008. As indicated above, the reduction resulted from a
reduction in the amortization of discounts on convertible notes and value of
detachable warrants and related debt conversion expenses.
NET LOSS
Our net loss for the Quarter Ending Ended June 30 2009 decreased to $180,813
from net loss of $1,220,118 for the Quarter Ended June 30, 2008, representing a
decrease of 85%. The decrease is directly related to limited activity, due to a
lack of funds and a significant decrease in expenses from the amortization of
discounts on convertible notes and value of detachable warrants and for related
debt conversion expenses.
FINANCIAL CONDITION
CASH AND WORKING CAPITAL
-------------------------------------------------------
Percentage
June 30, 2009 December 31, 2008 Increase/(Decrease)
-------------------------------------------------------
Current Assets $29,121 $68 (42,725%)
Current Liabilities ($8,318,357) ($8,043,097) 3%
-------------------------------------------------------
Working Capital Deficit ($8,289,236) ($8,043,029) 3%
=======================================================
|
The increase to our working capital deficit was primarily attributable to an
increase in accounts payable and an increase in provision for lawsuit
settlements as discussed below.
27
LIABILITIES
-------------------------------------------------------
Percentage
June 30, 2009 December 31, 2008 Increase/(Decrease)
-------------------------------------------------------
Provisions for Lawsuit
Settlements $5,538,129 $5,345,113 4%
Accounts Payable $1,916,303 $1,869,757 2%
Accrued Liabilities $334,424 $320,000 5%
Short-Term Loans $529,501 $508,227 4%
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The increase in provision for lawsuits is due to accrued interest on outstanding
judgments. Accounts payable increased due to a lack of funds to pay creditors.
Short-term loans increased due to interest expense.
We continue to negotiate with our creditors for the payment of our accounts
payable and accrued liabilities. Payment of these liabilities is contingent on
new funding being received that would enable us to make payments to the
creditors. Our ability to continue our operations may also be conditional upon
the forbearance of our creditors.
Included in short-term loans at June 30, 2009 are unsecured, non-interest
bearing advances of $138,600 that we anticipate will be converted into shares of
our common stock.
CASH FLOWS
At June 30,
----------------------
2009 2008
---- ----
Net Cash provided by (used in) Operating Activities ($120,947) ($221,955)
Net Cash provided by (used in) Financing Activities $150,000 $323,500
Net Increase (Decrease) in Cash During Period $29,053 $101,545
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CASH USED IN OPERATING ACTIVITIES
The decrease in cash used in operating activities was due to the limited amount
of funds available compared to 2008.
FINANCING REQUIREMENTS
We will require additional financing if we are to continue as a going concern
and to finance our business operations. While we have obtained some financing in
2009 we need substantially more capital to complete development and continue our
business. There is no assurance that we will be able to raise the required
additional capital. In the event that we are unable to raise additional
financing on acceptable terms, then we may have to cease operating and seek
relief under appropriate statutes. Accordingly, there is substantial doubt about
our ability to continue as a going concern.
28
We believe, however that recent technical developments provide the Company with
potential for substantial growth but this will require investment. There is no
assurance that we will obtain sufficient funding or otherwise be able to achieve
our goals.
29
CRITICAL ACCOUNTING POLICIES
STOCK BASED COMPENSATION
The Company accounts for stock-based compensation under the fair value method in
accordance with Statement of Financial Accounting Standards No.123 (revised
2004), "Share Based Payment" "SFAS 123(R)". SFAS No. 123R requires the Company
to establish assumptions and estimates of the weighted-average fair value of
stock options granted, as well as using a valuation model to calculate the fair
value of stock-based awards. The Company uses the Black-Scholes option-pricing
model to determine the fair-value of stock-based awards. All options are
amortized over the requisite service periods of the awards, which are generally
the vesting periods.
NEW ACCOUNTING PRONOUNCEMENTS
In April 2009, the FASB issued FASB Staff Position (FSP) No. FAS 115-2 and FAS
124-2, "Recognition and Presentation of Other-Than-Temporary Impairments," to
determine whether the holder of an investment in a debt or equity security for
which changes in fair value are not regularly recognized in earnings (such as
securities classified as held-to-maturity or available-for-sale) should
recognize a loss in earnings when the investment is impaired. FSP No. FAS 115-2
and FAS 124-2 improves the presentation and disclosure of other-than-temporary
impairments on debt and equity securities in the financial statements. The
effective date for interim and annual reporting periods ending after June 15,
2009, with early adoption permitted for periods ending after March 15, 2009.
Earlier adoption for periods ending before March 15, 2009, is not permitted. The
adoption of this FSP did not have an impact on the Company's financial
statements.
In May 2009, the FASB issued SFAS No. 165, "Subsequent Events," which requires
entities to disclose the date through which they have evaluated subsequent
events and whether the date corresponds with the release of their financial
statements. The statement establishes general standards of accounting for and
disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. SFAS No. 165 is
effective for interim or annual financial periods ending after June 15, 2009,
and shall be applied prospectively. The adoption of SFAS No. 165 did not have a
material impact on the Company's consolidated financial statements.
In June 2009, the FASB issued SFAS No. 166, "Accounting for Transfers of
Financial Assets," which is an amendment of SFAS No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,"
requires entities to provide more information about sales of securitized
financial assets and similar transactions, particularly if the seller retains
some risk to the assets. This statement will improve the relevance,
representation faithfulness, and comparability of the information that a
reporting entity provides in its financial statements about a transfer of
financial assets. It will also take into account the effects of a transfer on
its financial position, financial performance, and cash flows, and a
transferor's continuing involvement. SFAS No. 166 is effective for annual
periods beginning after November 15, 2009. This statement is effective for the
Company beginning January 1, 2010 and is expected to have no material impact on
the financial statements.
In June 2009, the FASB issued SFAS No. 167, "Amendments to FASB interpretation
No. 46(R)," establishes how a company determines when an entity that is
insufficiently capitalized or not controlled through voting should be
consolidated. This statement improves financial reporting by enterprises
involved with variable interest entities, which addresses the effects on certain
provisions of FASB interpretation No. 46, "Consolidation of Variable Interest
Entities," as a result of the elimination of the qualifying special-purpose
entity concept in FASB No. 166, "Accounting for Transfers of Financial Assets,"
and constituent concerns about the application of certain key provisions of
Interpretation 46(R). SFAS No. 167 is effective after November 15, 2009. This
statement is effective for the Company beginning January 1, 2010 and is expected
to have no material impact on the financial statements.
30
In June 2009, the FASB issued SFAS No. 168, "The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles,"
Replaces SFAS No. 162, establishes the source of authoritative U.S. generally
accepted accounting principles (GAAP) recognized by the FASB to be applied by
nongovernmental entities. On the effective date for financial statements issued
for interim and annual periods ending after September 15, 2009, the Codification
will supersede all then-existing non-SEC accounting and reporting standards. The
Company has determined that the adoption of SFAS No. 168 will not have an impact
on the financial statements.
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ITEM 4. CONTROLS AND PROCEDURES.
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
As required by Rule 13a-15 under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), the Company's Chief Executive Officer and its Chief
Financial Officer reviewed and evaluated the effectiveness of the Company's
disclosure controls and procedures (as defined in Exchange Act Rule
13a-15(e)).These controls are designed to ensure that material information the
Company must disclose in its reports filed or submitted under the Exchange Act
is recorded, processed, summarized and reported on a timely basis. These
officers have concluded, based on that evaluation, that as of such date, the
Company's disclosure controls and procedures were effective at a reasonable
assurance level for a Company with substantially no activities and no personnel.
The Company believes it must devise new procedures as it increases its activity
and its personnel.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act Rule
13a-15(f). As required by Rule 13a-15 under the Exchange Act the Company's Chief
Executive Officer and its Chief Financial Officer assessed the effectiveness of
our internal control over financial reporting as of December 31, 2008. In making
its assessment of internal control over financial reporting, management used the
criteria described in Internal Control -- Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
Based on this assessment management identified a material weaknesses in the
Company's internal controls over financial reporting due in a significant part
to the pervasive effect of the lack of resources, specifically the limited
number of personnel involved in the financial reporting including the number of
persons that are appropriately qualified in the areas of U.S. GAAP and SEC
reporting. These limitations include an inability to segregate functions.
Because of this weakness there is a possibility that a material misstatement of
the annual financial statements would not have been prevented or detected.
Nevertheless the Company's Chief Executive Officer and Chief Financial Officer
believed that for the limited operations of the Company internal controls over
financial reporting were adequate to provide reasonable assurance of the
accuracy of the Company's financial statements at year end. The adverse effect
of the material weakness over internal controls, however, will become magnified
if the Company increases operations.
Due to the complexity of the accounting for the convertible notes with
detachable warrants, there were material additional adjustments made to our
annual financial statements prior to their publication in this report as well as
interim financial statements after filing. In management's view, this was not
the result of a material weakness in internal control but due to the complexity
of the accounting rules and their interpretations affecting transactions of this
nature.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no changes in our internal control over financial reporting that
occurred during our most recent fiscal quarter that have materially affected, or
are reasonably likely to materially affect, our internal control over financial
reporting.
32
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
NONE
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
On June 30, 2009 we issued 1,000,000 restricted shares of our common stock to
John Adams for the October 2008 through June 30, 2009 service based stock
according to the Consulting Agreement effective January 1, 2008. The shares were
issued pursuant to Section 4(2) of the Securities Act of 1933 and are exempt
from the registration requirements under that act.
ITEM 5. OTHER INFORMATION
The Company has agreed to pay Aspatuck Holdings, Ltd. $64,000 of the accounts
payable owed as funds become available and then $10,000 per month until all
amounts, currently $357,227 are repaid. The accounts payable is for the services
of the primary shareholder of Aspatuck, Jason Meyers.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- -------------------------------------------------------------------
31.1 Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
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34
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has caused this registration statement to be signed on its behalf
by the undersigned, thereunto duly authorized.
TURBODYNE TECHNOLOGIES, INC.
Signature Title Date
--------- ----- ----
/s/ Jason Meyers Co-Chief Executive Officer, August 14, 2009
---------------------- Director
Jason Meyers
/s/ Debi Kokinos Chief Financial Officer August 14, 2009
---------------------- and Chief Accounting Officer
Debi Kokinos
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35
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