The accompanying notes are an integral part of these financial statements.
Turbine Truck Engines, Inc.
(A Development Stage Enterprise)
For the Three and Six Months Ended June 30, 2012 and 2011,
and the Period November 27, 2000 (Date of Inception)
through June 30, 2012
1. Background Information
Turbine Truck Engines, Inc. (the “Company”) is a development stage enterprise that was incorporated in the state of Delaware on November 27, 2000, and converted to a Nevada corporation in 2008 To date, the Company’s activities have been limited to raising capital, organizational matters, and the structuring of its business plan. The corporate headquarters is located in Paisley, Florida.
The Company’s planned lines of business are the design, development, and testing of turbine truck engine technology licensed through Alpha Engines Corporation (“Alpha”). Alpha owns the patents to a new gas turbine engine system called Detonation Cycle Gas Turbine Engine. If the Company can successfully demonstrate a highway truck engine using the technology, the Company intends to form a joint venture with a major heavy duty highway truck manufacturer to manufacture, market, and sell turbine truck engines for use in heavy duty highway trucks throughout the United States.
2. Financial Statements
In the opinion of management, all adjustments consisting only of normal recurring adjustments necessary for a fair statement of (a) the results of operations for the three and six month periods ended June 30, 2012 and 2011 and the period November 27, 2000 (Date of Inception) through June 30, 2012, (b) the financial position at June 30, 2012 and December 31, 2011, and (c) cash flows for the six month periods ended June 30, 2012 and 2011, and the period November 27, 2000 (Date of Inception) through June 30, 2012, have been made.
The unaudited financial statements and notes are presented as permitted by Form 10-Q. Accordingly, certain information and note disclosures normally included in the financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted. The accompanying financial statements and notes should be read in conjunction with the audited financial statements and notes of the Company for the fiscal year ended December 31, 2011. The results of operations for the three and six month periods ended June 30, 2012 are not necessarily indicative of those to be expected for the entire year.
3. Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. For the three and six months ended June 30, 2012 and since November 27, 2000 (date of inception) through June 30, 2012, the Company has had a net loss of $385,494, $796,104 and $17,167,262, respectively. These factors raise doubt about the Company’s ability to continue as a going concern. As of June 30, 2012, the Company has not emerged from the development stage. In view of these matters, the Company’s ability to continue as a going concern is dependent upon the Company’s ability to begin operations and to achieve a level of profitability. Since inception, the Company has financed its activities principally from the sale of public equity securities. The Company intends on financing its future development activities and its working capital needs largely from the sale of public equity securities with some additional funding from other traditional financing sources, including term notes and proceeds from sub-licensing agreements until such time that funds provided by operations are sufficient to fund working capital requirements. The financial statements of the Company do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classifications of liabilities that might be necessary should the Company be unable to continue as a going concern.
4. Commitments and Contingencies
The Company leased its corporate headquarters on a month-to-month basis. For the six months ended June 2012 and 2011, rent expense was approximately $12,500, and $12,500, respectively.
The Company entered into a Cooperation Agreement (the “Agreement���) with Hydrogen Union Energy Co., Ltd. (“HUE”) for the purpose of the joint development of the hydrogen generator. Under the terms of the Agreement, HUE will provide hydrogen generators at cost to the Company for demonstration purposes. Once the Company purchases the first H2 generator and pays 90% of the purchase price, the Company will be given first refusal to act as agent for any future business relating to hydrogen generators with HUE’s technology in North America. The Company was to pay the cost of production of a 200 cubic meter H2 generator at 10,000,000 TWD ($338,000 USD as of June 30, 2012) for up to two machines. As previously disclosed, the Company is continuing negotiations with payment terms and accordingly no equipment has been received and no liability has been recorded as of June 30, 2012. At period end the Company was in negotiations with HUE’s parent corporation Energy Technology Services Co., Ltd. (“ETS”) and all agreements with ETS may potentially impact or supersede the agreement with HUE.
On January 12, 2012, the Company entered into an “Investment Intent” agreement with Energy Technology Services Company, Ltd. Pursuant to the agreement, both parties agreed to form a company, Global Hydrogen Energy (“GHE”). The Company has the option to purchase ten percent of the shares of GHE for $450,000, and another option to purchase up to 20% of all shares of GHE. As of June 30, 2012, GHE has not been formed, and the Company has made a good faith cash deposit of $197,500, which is included as a non-current asset at June 30, 2012. The Company does not have a firm commitment to fund the remaining option amount, and accordingly, a commitment liability was not recorded as of June 30, 2012 related to this agreement (See Note 11 for subsequent event).
5. Related Party Transactions
During the year ended December 31, 2003, the Company signed a note payable with a related party in the amount of $15,000. The balance at June 30, 2012 and December 31, 2011 is $1,901. This note payable was unsecured, non-interest bearing and has no specific repayment terms, however, payment is not expected prior to March 31, 2013.
As of June 30, 2012 and December 31, 2011, accounts payable included $12,220 due to a director of the Company for various accounting services.
During the year end December 31, 2011, the Company’s President advanced the Company $5,000 with no specific repayment terms or stated interest, as of June 30, 2012 $1,430 remains unpaid.
On March 15, 2012, the Board of Directors resolved to issue 500,000 shares of Series A Convertible Preferred shares to Michael Rouse, the Company’s President and CEO, in exchange for $335,285 of unpaid and accrued salary.
The Company entered into a Debt Settlement Agreement (the “Agreement”) dated April 27, 2012 with Alpha Engines Corporation (“Alpha”). The Company and Alpha entered into a License Agreement dated December 31, 2001, pursuant to which the Company has accrued royalties and other payables to Alpha in the amount of $1,508,250 as of the date of the Agreement. Pursuant to the terms of the Agreement, Alpha agreed to accept 250,000 shares of the company common stock in full settlement of the above royalties and other payables and further agreed to reduce the annual license royalty payable under the License Agreement from $250,000 per year to $25,000 per year, retroactive to January 1, 2012, with the first payment being due January 1, 2013. On April 27, 2012, the Company recorded the difference between the fair value of the common stock issued to Alpha and the settlement of the accrued royalties and other payables as a capital contribution from Alpha to the Company, which is included in additional paid-in capital at June 30, 2012.
The above terms and amounts are not necessarily indicative of the terms and amounts that would have been incurred had comparable transactions been entered into with independent parties.
6. Convertible Note Payable
In June 2008, the Company issued a Convertible Debenture to Golden Gate Investors, Inc. (the “holder”) in the principal amount of $1,000,000, dated June 6, 2008, pursuant to Rule 506 promulgated by the Securities and Exchange Commission, for the purpose of accessing necessary funding to continue operations.
Pursuant to the terms of the Debenture, the related Securities Purchase Agreement, Secured Promissory Note and Stock Pledge Agreement, each executed in connection therewith, the Company has issued its $1,000,000 Convertible Debenture (the “Debenture”) for the payment by Golden Gate of $100,000 in cash and the execution and delivery by Golden Gate of a $900,000 Secured Promissory Note of even date (the “Note”), bearing interest at 8% per annum. For financial statement purposes, these items have been netted, as the Company has the legal right of offset.
The Debenture bears interest at 7.75% per annum, payable monthly, maturing June 30, 2012, and was secured by a Continuing Personal Guaranty, whereby the Company’s Chief Executive Officer and majority shareholder guaranteed the Company’s obligations for a period of eight months. Originally, the Debenture Holder was entitled to convert into common stock of the company at the conversion price equal to the lesser of (i) $0.50, or (ii) 80% of the average of the 3 lowest Volume Weighted Average Prices during the 20 Trading Days prior to Holder’s election to convert, as such terms are defined in the Debenture. The Holder can only convert that amount of the Debenture that has actually been paid for by either cash at closing or principal pre-payments made on the Promissory Note.
During 2012 and since inception, the Company has drawn $0 and $795,000 in proceeds related to the note, respectively. During 2012 and since inception, the Holder has converted $0 and $772,000 in convertible notes into 0 and 7,340,152 common shares, respectively. As of June 30, 2012, the Company has $205,000 available to draw on the convertible debenture.
In December 2009, the convertible debenture agreement was amended. As a result of the amendment, effective January 15, 2010, the conversion price has a $0.15 fixed floor price that limits the number of common shares upon conversion to an amount that is substantially below the Company’s authorized common shares that can be issued.
Additionally, the penalty associated with the default provision to maintain timely filings of all reports required by the Securities and Exchange Commission was removed. Lastly, the default provision related to the interest rate adjustment indexed to changes in the Company’s common stock was removed. In the event of certain defaults, the Company would pay a default fixed interest rate of 9.75% per annum.
7. Earnings per Share
Basic loss per share is computed by dividing net loss attributable to common stockholders by the weighted average common shares outstanding for the period. Diluted loss per share is computed giving effect to all potentially dilutive common shares. Potentially dilutive common shares may consist of incremental shares issuable upon the exercise of stock options and warrants and the conversion of notes payable to common stock. In periods in which a net loss has been incurred, all potentially dilutive common shares are considered antidilutive and thus are excluded from the calculation. For the three and six month periods ended June 30, 2012 and 2011 and for the period from November 27, 2000 (Date of Inception) through June 30, 2012, the Company had 5,405,413, 3,915,413 and 5,405,413 potentially dilutive common stock options and warrants, respectively, which were not included in the computation of loss per share. Additionally, two convertible notes with face amounts totaling $92,500 can convert into approximately 2,948,000 shares of common stock at June 30, 2012.
8. Common stock for services
During the six months ended June 30, 2012, the Company issued 2,150,000 shares of common stock to consultants and employees for various services. The Company recorded the stock issuances for services based on the fair value of the common stock at the respective commitment dates, and amortized the grant-date fair value of the shares over the estimated requisite service period. For the three and six months ended June 30, 2012 and 2011, the Company recognized approximately $229,000 and $457,000 and $81,000 and $589,000 in compensation expense related to these issuances, respectively.
Additionally, as of June 30, 2012, included in common stock payable, are commitments to issue 1,500,000 shares of common stock. The amortization expense related to these commitments are included in the above compensation expense.
9. Series A Convertible Preferred Stock
On March 16, 2012, the Company created the Series A Convertible Preferred Stock (“Series A”). The Series A has the following features:
| | ● | Par value is $.001. |
| | ● | 1,000,000 shares authorized. |
| | ● | Voting rights on each matter submitted to common shareholders; 306 votes per each share of preferred stock held. |
| | ● | Convertible after 6 months from the above date on a ratio of one-to-one into common shares at the option of the preferred share holder. |
In November 2011, the Company issued a convertible promissory note for $42,500. The note pays interest at 8% per annum, and principal and accrued interest is due on the maturity date of August 9, 2012. The conversion option price associated with the note has a 41 percent discount to the market price of the stock. The market price is based on the average of the three lowest trading prices during a ten day period prior to conversion. The note is convertible at any time. As a result of the variable feature associated with the conversion option, pursuant to ASC Topic 815, the Company bifurcated the conversion option, and utilized the black Scholes model to determine the fair value of the conversion option. At the issuance date, the Company recorded a debt discount and derivative liability of approximately$42,000 and $49,000, respectively. The debt discount was amortized over the life of the note, and the Company recognized approximately $34,000 of interest expense related to amortization during 2012. As of June 30, 2012 the discount related to the note was fully amortized. In June 2012, the convertible note converted into approximately 1,326,000 shares of common stock. At the conversion date, the amortized discount was fully recognized as interest expense. The derivative liability has been adjusted to fair value each reporting period, including the conversion date, with unrealized gain (loss) reflected in other income and expense.
In April 2012, the Company issued a convertible promissory note for $42,500. The note pays interest at 8% per annum, and principal and accrued interest is due on the maturity date of January 18, 2013. The conversion option price associated with the note has a 41 percent discount to the market price of the stock. The market price is based on the average of the three lowest trading prices during a ten day period prior to conversion. The note is convertible at any time. As a result of the variable feature associated with the conversion option, pursuant to ASC Topic 815, the Company bifurcated the conversion option, and utilized the black Scholes model to determine the fair value of the conversion option. At the issuance date, the Company recorded a debt discount and derivative liability of approximately$42,000 and $62,000, respectively. The debt discount will be amortized over the life of the note, and the Company recognized approximately $12,000 of interest expense related to amortization during 2012. The derivative liability has been adjusted to fair value each reporting period with unrealized gain (loss) reflected in other income and expense.
On April 24 2012 (the “Closing date”), the Company issued a convertible promissory note for $278,000. At the closing date, the lender funded $50,000 to the Company, and the lender at their discretion may fund additional amounts to the Company. The note matures one year from the closing date. If the Company pays the note within 90 days of the closing date, the interest rate is 0%. If the note is not paid within 90 days of the closing date, a one-time interest charge of 5% will be applied to the unpaid principal amount. The conversion option price associated with the note is the lesser of $.10 or 70% of the lowest trade price in the 25 trading days previous to any conversion. The note is convertible at any time. As a result of the variable feature associated with the conversion option, pursuant to ASC Topic 815, the Company bifurcated the conversion option, and utilized the black Scholes model to determine the fair value of the conversion option. At the issuance date, the Company recorded a debt discount and derivative liability of approximately$50,000 and $61,000, respectively. The debt discount will be amortized over the life of the note, and the Company recognized approximately $9,000 of interest expense related to amortization during 2012. The derivative liability has been adjusted to fair value each reporting period with unrealized gain (loss) reflected in other income and expense.
Related to the above derivative liabilities, the Company recognized approximately $31,000 in derivative expense at issuance or closing date of the above notes. As of June 30, 2012, the unrealized gain on the above derivatives was approximately $16,000.
Liabilities measured at fair value on a recurring basis by level within the fair value hierarchy as of June 30, 2012 and 2011 related to the above derivative liability are as follows:
| | | Fair Value Measurements at June 30, 2012 (1) | | | Fair Value Measurements at December 31, 2011(1) | |
| | | Using Level 2 | | | Total | | | Using Level 2 | | | Total | |
| Liabilities: | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Derivative liabilities | | $ | (109,805 | ) | | $ | (109,805 | ) | | $ | (40,756 | ) | | $ | (40,756 | ) |
| Total liabilities | | $ | (109,805 | ) | | $ | (109,805 | ) | | $ | (40,756 | ) | | $ | (40,756 | ) |
| | (1) | The Company did not have any assets or liabilities measured at fair value using Level 1 or Level 3 of the fair value hierarchy as of June 30, 2012 or 2011. |
The Company’s derivative liabilities are classified within Level 2 of the fair value hierarchy. The Company utilizes the Black-Scholes Option Pricing Model to value the derivative liabilities utilizing observable inputs such as the Company’s common stock price, the exercise price of the warrants, and expected volatility, which is based on historical volatility. The Black-Scholes model employs the market approach in determining fair value.
The Company (“TTE”) entered into a Joint Venture Agreement (the “Agreement”) dated July 11, 2012 with ENERGY TECHNOLOGY SERVICES CO. LTD. (“ETS”) for the purpose of the engaging both parties in the manufacture, leasing and /or sale of ETS’s hydrogen generator burning systems (the “Equipment”) in Asia.
The Agreement has a term of one (1) year and renews automatically if not otherwise terminated, provided however, all contracts signed through the joint venture will remain effective regardless of whether the joint venture is still in force. TTE will purchase and own all Equipment to be leased and will review and approve all lease contracts prior to the manufacture of the Equipment. TTE will be the employer of record for all employees of the Joint Venture and will be the sole signatory of all Joint Venture bank accounts. TTE will make monthly payments to the parties, if applicable. Under the Agreement, ETS is granted the right to market, sell, lease, and distribute the Equipment via Sale or Lease agreements in Asia. ETS will arrange for the manufacturing and on-time delivery and installation of the Equipment to order, and will be responsible for providing maintenance, training and services for all the Equipment. All lease and sales revenue is to be deposited into the TTE maintained JV account, and each party is to submit monthly invoices for their reasonable operating expenses. Net Profit of the JV is to be split 50/50 on a monthly basis, after payment of all reasonable operating expenses, taxes and interest. Each party retains the right to audit the other party’s books and records as related to the Joint Venture.
Effective July 12, 2012, the Company amended its Articles of Incorporation filed with the Nevada Secretary of State, to reflect the Board of Directors adoption of a resolution, consented to by those holding a majority of the common shareholder votes, which increased the authorized common stock of the company to 299,000,000 shares of common stock, having a par value of $.001.
THIS FILING CONTAINS FORWARD-LOOKING STATEMENTS. THE WORDS “ANTICIPATED,” “BELIEVE,” “EXPECT,” “PLAN,” “INTEND,” “SEEK,” “ESTIMATE,” “PROJECT,” “WILL,” “COULD,” “MAY,” AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. THESE STATEMENTS INCLUDE, AMONG OTHERS, INFORMATION REGARDING FUTURE OPERATIONS, FUTURE CAPITAL EXPENDITURES, AND FUTURE NET CASH FLOW. SUCH STATEMENTS REFLECT THE COMPANY’S CURRENT VIEWS WITH RESPECT TO FUTURE EVENTS AND FINANCIAL PERFORMANCE AND INVOLVE RISKS AND UNCERTAINTIES, INCLUDING, WITHOUT LIMITATION, GENERAL ECONOMIC AND BUSINESS CONDITIONS, CHANGES IN FOREIGN, POLITICAL, SOCIAL, AND ECONOMIC CONDITIONS, REGULATORY INITIATIVES AND COMPLIANCE WITH GOVERNMENTAL REGULATIONS, THE ABILITY TO ACHIEVE FURTHER MARKET PENETRATION AND ADDITIONAL CUSTOMERS, AND VARIOUS OTHER MATTERS, MANY OF WHICH ARE BEYOND THE COMPANY’S CONTROL. SHOULD ONE OR MORE OF THESE RISKS OR UNCERTAINTIES OCCUR, OR SHOULD UNDERLYING ASSUMPTIONS PROVE TO BE INCORRECT, ACTUAL RESULTS MAY VARY MATERIALLY AND ADVERSELY FROM THOSE ANTICIPATED, BELIEVED, ESTIMATED, OR OTHERWISE INDICATED. CONSEQUENTLY, ALL OF THE FORWARD-LOOKING STATEMENTS MADE IN THIS FILING ARE QUALIFIED BY THESE CAUTIONARY STATEMENTS AND THERE CAN BE NO ASSURANCE OF THE ACTUAL RESULTS OR DEVELOPMENTS.
The following discussion and analysis of our financial condition and plan of operations should be read in conjunction with our financial statements and related notes appearing elsewhere herein. This discussion and analysis contains forward-looking statements including information about possible or assumed results of our financial conditions, operations, plans, objectives and performance that involve risk, uncertainties and assumptions. The actual results may differ materially from those anticipated in such forward-looking statements. For example, when we indicate that we expect to increase our product sales and potentially establish additional license relationships, these are forward-looking statements. The words expect, anticipate, estimate or similar expressions are also used to indicate forward-looking statements.
OVERVIEW OF THE COMPANY
We are a development-stage company and not yet generating any revenues. We expect to continue the commercialization of our Detonation Cycle Gas Turbine Engine (“DCGT”) technology. The licensor of the acquired technology has passed the research and development phase and has designed a working prototype. We need to redesign an engine for our application based on this proven Core Technology. We are relying on AbM Engineering in collaboration with AMEC to design, construct and test a 540 horsepower engine prototype for our licensed application.
The financing for our development activities to date has come from the sale of common stock. We intend to finance our future development activities and working capital needs largely from the sale of public equity securities with additional funding from a private placement or secondary offering of up to $10 million and other traditional financing sources, including term notes and proceeds from sub-licensing agreements until such time that funds provided by operations are sufficient to fund working capital requirements.
Since we have had a limited history of operations, we anticipate that our quarterly results of operations will fluctuate significantly for the foreseeable future. We believe that period-to-period comparisons of our operating results should not be relied upon as predictive of future performance. Our prospects must be considered in light of the risks, expenses and difficulties encountered by companies at an early stage of development, particularly companies commercializing new and evolving technologies such as the DCGT. In July 2002, we acquired the license for the DCGT technology for the manufacture and marketing of heavy-duty highway truck engine.
For the three months ended June 30, 2012 compared to the three months ended June 30, 2011
Research and Development Costs – During the three months ended June 30, 2012 and 2011, research and development costs totaled $0 and $87,059, respectively. The decrease of $87,059 was mainly attributable to additional costs incurred for the testing of the DCGT engine in 2011.
Operating Costs – During the three months ended June 30, 2012 and 2011, operating costs totaled $355,071 and $394,905, respectively. The decrease of $39,024 was mainly attributable to decreases in payroll expenses related to reduction of executive salaries pursuant to employment agreements, a reduction of stock compensation related to warrants issued to consultants in the prior period, and a reduction in royalty expense associated with the debt settlement agreement discussed in Note 5. These decreases were offset by an increase in consulting expenses related to common stock issued to consultants for various services.
Interest (Income) Expense - Net - During the three months ended June 30, 2012 and 2011, net interest expense totaled $38,941 and $3,425, respectively. The increase of $35,516 was primarily due to the Company amortizing the discount on convertible debt issued in the fourth quarter of 2011 and second quarter of 2012.
The net loss for the three months ended June 30, 2012 and 2011 was $385,494 and $484,579, respectively. The decrease of $99,085 was mainly attributable to the decrease in operating expenses, and research and development expense, offset by increases in interest expense.
The trend in our operating expenses will depend on our ability to raise capital and fund our operations. We do expect the trend in consulting expenses to increase as we issue additional stock in-lieu of cash to fund operations. Salary expense should remain stable with employment agreements in place for our executives. Royalty expense will continue to decrease relative to comparable periods as a result of the debt settlement agreement discussed above.
For the six months ended June 30, 2012 compared to the three months ended June 30, 2011
Research and Development Costs – During the six months ended June 30, 2012 and 2011, research and development costs totaled $0 and $103,432, respectively. The decrease of $103,432 was mainly attributable to additional costs incurred for the testing of the DCGT engine in 2011.
Operating Costs – During the six months ended June 30, 2012 and 2011, operating costs totaled $758,948 and $1,209,127, respectively. The decrease of $450,179 was mainly attributable to decreases in payroll expense, stock compensation, amortization expense, professional fees, and royalty expense, offset by an increase in consulting expenses.
Interest (Income) Expense - Net - During the six months ended June 30, 2012 and 2011, net interest expense totaled $52,954 and $6,988, respectively. The increase of $45,966 was primarily due to the Company amortizing the discount on convertible debt to interest expense during 2012, as discussed above.
The net loss for the six months ended June 30, 2012 and 2011 was $796,104 and $1,319,547, respectively. The decrease of $523,443 was mainly attributable to the decrease in operating expenses, and research and development expense, offset by increases in interest expense.
The trend in our operating expenses will depend on our ability to raise capital and fund our operations. We do expect the trend in consulting expenses to increase as we issue additional stock in-lieu of cash to fund operations. Salary expense should remain stable with employment agreements in place for our executives.
Liquidity and capital resources
As shown in the accompanying financial statements, for the three and six months ended June 30, 2012 and 2011 and since November 27, 2000 (date of inception) through June 30, 2012, the Company has had net losses of $385,494, $796,104 and $17,162,262, respectively. As of June 30, 2012, the Company has not emerged from the development stage. In view of these matters, the Company’s ability to continue as a going concern is dependent upon the Company’s ability to begin operations and to achieve a level of profitability. However, there can be no assurance that the Company will be able to raise capital or begin operations to achieve a level of profitability to continue as a going concern. Since inception, the Company has financed its activities principally from the sale of public equity securities. The Company intends on financing its future development activities and its working capital needs largely from the sale of public equity securities with some additional funding from other traditional financing sources, including term notes and proceeds from sub-licensing agreements until such time that funds provided by operations are sufficient to fund working capital requirements.
As previously mentioned, since inception, we have financed our operations largely from the sale of common stock. From inception through June 30, 2012 we raised cash of approximately $4,057,000 net of issuance costs, through private placements of common stock financings and $987,000 through the issuance of convertible notes payable.
