UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended JUNE 30, 2005
[ ] 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
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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)
2848 SIOUX AVENUE,
VENTURA, CALIFORNIA 93001
- ---------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (805) 201-3133
---------------
NOT APPLICABLE
--------------
(Former name, former address and former fiscal year end,
if changed since last report)
Check whether the issuer (1) 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 issuer was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days [X] Yes [ ] No
State the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date: 320,559,444 shares of common stock
issued and outstanding as of MAY 10, 2006.
Transitional Small Business Disclosure Format (check one): Yes [ ] NO [X]
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 2005 AND 2004
(UNAUDITED - EXPRESSED IN US DOLLARS)
F-1
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 2005 AND 2004
(UNAUDITED - EXPRESSED IN US DOLLARS)
CONTENTS
- --------------------------------------------- ----------------------------------
CONSOLIDATED FINANCIAL STATEMENTS
Balance Sheets F-3
Statements of Operations F-4
Statements of Capital Deficit F-5
Statements of Cash Flows F-6
Notes to the Financial Statements F-7
F-2
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TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED - EXPRESSED IN US DOLLARS)
JUNE 30 December 31
2005 2004
- ----------------------------------------------------------------------------------------------
ASSETS
CURRENT
Cash $ 458 $ 1,615
Prepaid expenses and other current assets 1,272 50,055
------------- -------------
TOTAL CURRENT ASSETS 1,730 51,670
PROPERTY AND EQUIPMENT, net 34,754 45,002
CERTIFICATE OF DEPOSIT (NOTE 4(D)) -- 240,000
------------- -------------
TOTAL ASSETS $ 36,484 $ 336,672
==============================================================================================
LIABILITIES AND CAPITAL DEFICIT
LIABILITIES
CURRENT
Current portion of long-term debt (Note 3) $ 32,525 $ 6,460
Accounts payable (Note 3) 2,375,177 2,226,102
Accrued liabilities (Note 2) 512,935 285,935
Provisions for lawsuit settlements (Note 4) 6,300,273 6,013,198
Loans payable 148,600 148,600
------------- -------------
TOTAL CURRENT LIABILITIES 9,369,510 8,680,295
LONG-TERM DEBT (NOTE 3) -- 27,054
DEFERRED REVENUE 352,614 363,726
------------- -------------
TOTAL LIABILITIES 9,722,124 9,071,075
------------- -------------
CAPITAL 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
45,175 (52,175 - 2004) preferred shares 45 52
171,674,355 (160,157,955 - 2004) common shares 171,674 160,158
Treasury stock, at cost (378,580 shares) (1,907,612) (1,907,612)
Additional paid-in capital 120,906,209 120,544,963
Accumulated other comprehensive income -
foreign exchange translation gain 35,119 35,119
Accumulated deficit (128,891,075) (127,567,083)
------------- -------------
TOTAL CAPITAL DEFICIT (9,685,640) (8,734,403)
------------- -------------
TOTAL LIABILITIES AND CAPITAL DEFICIT $ 36,484 $ 336,672
==============================================================================================
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
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TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED - EXPRESSED IN US DOLLARS)
THREE-MONTH SIX-MONTH
PERIODS ENDED PERIODS ENDED
JUNE 30 JUNE 30
2005 2004 2005 2004
- ----------------------------------------------------------------------------------------------------------------
REVENUE
Licensing fees $ 5,556 $ 5,556 $ 11,112 $ 11,112
------------- ------------- ------------- -------------
TOTAL REVENUE 5,556 5,556 11,112 11,112
------------- ------------- ------------- -------------
EXPENSES (RECOVERY)
Selling, general and administrative 200,742 262,579 326,763 (37,314)
Research and development 161,049 257,865 371,486 454,250
Litigation expense 371,102 514,732 628,184 1,295,840
Depreciation and amortization 1,320 14,513 10,248 29,026
------------- ------------- ------------- -------------
TOTAL EXPENSES 734,213 1,049,689 1,336,681 1,741,802
------------- ------------- ------------- -------------
LOSS FROM OPERATIONS (728,657) (1,044,133) (1,325,569) (1,730,690)
OTHER INCOME (EXPENSES)
Settlement of litigation (Note 4) -- -- -- 6,375,000
Interest expense -- (3,162) (1,030) (5,232)
Interest Income 663 7,220 1,837 7,832
Gain (loss) on sale of asset (4,471) 770 (371)
Gain on settlement of term debt -- -- -- 43,360
(Note 3)
------------- ------------- ------------- -------------
NET INCOME (LOSS) FOR THE PERIOD $ (727,994) $ (1,044,546) $ (1,323,992) $ 4,689,899
================================================================
Income (loss) per common share
BASIC AND DILUTED $ (0.00) $ (0.01) $ (0.01) $ 0.03
================================================================================================================
WEIGHTED AVERAGE SHARES USED FOR BASIC INCOME
(LOSS) PER SHARE 171,262,122 148,771,749 167,685,557 148,771,749
================================================================================================================
WEIGHTED AVERAGE SHARES USED FOR DILUTED
INCOME (LOSS) PER SHARE 171,262,122 148,771,749 167,685,557 160,012,360
================================================================================================================
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
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TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CAPITAL DEFICIT
(UNAUDITED - EXPRESSED IN US DOLLARS)
Preferred Stock Common Stock Treasury Stock
----------------------------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount
- ----------------------------------------------------------------------------------------------------------------------------
BALANCE,
JANUARY 1, 2004 97,175 $ 97 148,771,749 $ 148,772 378,580 $ (1,907,612)
Private placements of
common stock -- -- 1,000,000 1,000 -- --
Reversal of liability
for settlement of -- -- -- -- -- --
equity instruments
from prior periods
(Note 2(a))
Exercise of stock
options -- -- 2,935,000 2,935 -- --
Issuance of stock
for services -- -- 332,500 332 -- --
Issuance of stock
for debt -- -- 2,589,036 2,589 209,963 --
Issuance of stock for
settlement of -- -- 4,179,670 4,180 -- --
awsuit (Note 4)
Issuance of stock
options to -- -- -- -- -- --
non-employees
for services
Issuance of warrants
to non-employees -- -- -- -- -- --
for services
Issuance of stock
options to employees -- -- -- -- -- --
Conversion of preferred
Series X shares (45,000) (45) 4,500,000 4,500 -- --
Escrow shares -- -- (4,150,000) (4,150) -- --
Net loss for the year -- -- -- -- -- --
----------------------------------------------------------------------------------------------
BALANCE,
DECEMBER 31, 2004 52,175 52 160,157,955 160,158 378,580 (1,907,612)
Exercise of stock
options (Note 2 (c)) -- -- 10,816,400 10,816 -- --
Issuance of stock
options to -- -- -- -- -- --
non-employees
for services
(Note 2 (d))
Issuance of stock
options to
employees -- -- -- -- -- --
(Note 2 (d))
Conversion of
preferred
Series X shares (7,000) (7) 700,000 700 -- --
(Note 2 (c))
Net loss for
the period -- -- -- -- -- --
----------------------------------------------------------------------------------------------
BALANCE,
JUNE 30, 2005 45,175 $ 45 171,674,355 $ 171,674 378,580 $ (1,907,612)
============================================================================================================================
Additional Other
Paid-in Comprehensive Accumulated Capital
Capital Income Deficit Deficit
- ------------------------------------------------------------------------------------------
BALANCE,
JANUARY 1, 2004 $ 117,233,800 $ 35,119 $(130,476,823 $ (14,966,647)
Private placements of
common stock 48,678 -- -- 49,678
Reversal of liability
for settlement of 2,134,322 -- -- 2,134,322
equity instruments
from prior periods
(Note 2(a))
Exercise of stock
options 103,989 -- -- 106,924
Issuance of stock
for services 26,067 -- -- 26,399
Issuance of stock
for debt -- 212,552
Issuance of stock for
settlement of 288,173 -- -- 292,353
awsuit (Note 4)
Issuance of stock
options to 268,192 -- -- 268,192
non-employees
for services
Issuance of warrants
to non-employees 59,741 -- -- 59,741
for services
Issuance of stock
options to employees 172,343 -- -- 172,343
Conversion of preferred
Series X shares (4,455) -- -- --
Escrow shares 4,150 -- -- --
Net loss for the year -- -- 2,909,740 2,909,740
--------------------------------------------------------------
BALANCE,
DECEMBER 31, 2004 120,544,963 35,119 (127,567,083) (8,734,403)
Exercise of stock
options (Note 2 (c)) 178,196 -- -- 189,012
Issuance of stock
options to 41,991 -- -- 41,991
non-employees
for services
(Note 2 (d))
Issuance of stock
options to
employees 141,752 -- -- 141,752
(Note 2 (d))
Conversion of
preferred
Series X shares (693) -- -- --
(Note 2 (c))
Net loss for
the period -- -- (1,323,992) (1,323,992)
--------------------------------------------------------------
BALANCE,
JUNE 30, 2005 $ 120,906,209 $ 35,119 $(128,891,075 $ (9,685,640)
==========================================================================================
The accompanying notes are an integral part of these
consolidated financial statements
F-5
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TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED - EXPRESSED IN US DOLLARS)
FOR THE SIX-MONTH PERIODS ENDED JUNE 30 2005 2004
- --------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income (loss) $(1,323,992) $ 4,689,899
Adjustments to reconcile net loss for the period to net cash
provided by
(used in) operating activities:
Amortization of deferred licensing fees (11,112) (11,112)
Depreciation and amortization 10,248 29,026
Gain on settlement of term debt -- (43,360)
Loss on sale of asset -- 371
Recovery on lawsuit reserve from TST share sales (Note 4(a)) -- (23,345)
Stock option compensation 183,743 42,476
Liability in connection with settlement of equity instrument -- (406,000)
Increase in current assets
Prepaid expenses and other current assets 288,783 (83,844)
Increase (decrease) in current liabilities
Accounts payable 149,075 (1,496,962)
Accrued liabilities and provisions for lawsuit settlements 514,075 (1,161,703)
--------------------------
Net cash provided by (used in) operating activities (189,180) 1,535,446
--------------------------
INVESTING ACTIVITIES
Purchase of property and equipment -- (87,371)
Proceeds on sale of assets -- 4,100
--------------------------
Net cash used in investing activities -- (83,271)
--------------------------
FINANCING ACTIVITIES
Repayment of loans payable -- (504,938)
Net payments of term debts (989) --
Exercise of Stock Options 189,012 --
--------------------------
Net cash provided by (used in) financing activities 188,023 (504,938)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,157) 947,237
CASH AND CASH EQUIVALENTS, beginning of period 1,615 2,145
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 458 $ 949,382
==================================================================================================
SUPPLEMENTARY DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period
Interest $ 1,030 $ 788
Income taxes $ -- $ 7,200
SUPPLEMENTARY DISCLOSURE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES
Accounts payable transfer to loans payable $ -- $ 159,386
Return of asset to settle term debt $ -- $ 76,082
Liability in connection with settlement of
equity instruments $ -- $ 581,000
Reversal of liability in connection with
settlement of equity instruments $ -- $ 2,134,322
==================================================================================================
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
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TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED - EXPRESSED IN US DOLLARS)
JUNE 30, 2005 AND 2004
- --------------------------------------------------------------------------------
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
had a period of activity during 2004 and early 2005. Lack of funds caused the
Company to gradually curtail its operations until it ceased almost all
activities. In March 2005 the Company moved out of the business premises and
relinquished the majority of the fixed assets to the landlord to sell and
offset against rent payable.
The Company had no current business operations, place of business and no
employees when in September 2005, new management took control with the
purpose of attempting to resurrect the Company's business and seek financing
for such purpose. The Company entered a merger agreement in September 2005
that resulted in new management, which is examining alternatives for
financing, and fulfilling its working capital needs based on its working
capital projections.
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.
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. 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, 2004 and
2003 included in the Company's 10-KSB 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.
F-7
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TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED - EXPRESSED IN US DOLLARS)
JUNE 30, 2005 AND 2004
- --------------------------------------------------------------------------------
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
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 $128,891,075 at June 30, 2005 and a total capital deficit of $9,685,640 at
June 30, 2005. 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.
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., and
Electronic Boosting Systems Inc. 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:
Machinery and equipment - 7 to 15 years
Transportation equipment - 5 years
Furniture and fixtures - 5 to 10 years
- length of lease, not to exceed
Leasehold improvements economic lifelength of lease,
not to exceed
LICENSES
Licenses were recorded at cost and were being amortized at $208,000 per year
over their estimated useful life, which was estimated to be five years. At
December 31, 2003, management determined that the licenses had been impaired
and a $624,000 impairment provision was recorded.
VALUATION OF LONG-LIVED ASSETS
The Company periodically 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 2005 and 2004.
F-8
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TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED - EXPRESSED IN US DOLLARS)
JUNE 30, 2005 AND 2004
- --------------------------------------------------------------------------------
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-month period ended June 30, 2005 $11,112 ($11,112 - 2004) 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 reflects 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.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values of the Company's cash, term debts, accounts payable, accrued
liabilities and loans payable approximate their carrying values because of
the short-term maturities of these instruments.
STOCK-BASED COMPENSATION
Prior to January 1, 2005, the Company accounted for employee stock-based
compensation using the intrinsic value method supplemented by pro forma
disclosures in accordance with APB 25 and SFAS 123 "Accounting for
Stock-Based Compensation" ("SFAS 123"), as amended by SFAS No.148 "Accounting
for Stock-Based Compensation--Transition and Disclosures." Under the
intrinsic value based method, compensation cost is the excess, if any, of the
quoted market price of the stock at grant date or other measurement date over
the amount an employee must pay to acquire the stock. Under the intrinsic
value method, the Company has recognized stock-based compensation common
stock on the date of grant.
Effective January 1, 2005 the Company adopted SFAS 123R using the modified
prospective approach and accordingly prior periods have not been restated to
reflect the impact of SFAS 123R. Under SFAS 123R, stock-based awards granted
prior to its adoption will be expensed over the remaining portion of their
vesting period. These awards will be expensed under the accelerated
amortization method using the same fair value measurements which were used in
calculating pro forma stock-based compensation expense under SFAS 123. For
stock-based awards granted on or after January 1, 2005, the Company will
amortize stock-based compensation expense on a straight-line basis over the
requisite service period, which is generally a five-year vesting period.
F-9
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TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED - EXPRESSED IN US DOLLARS)
JUNE 30, 2005 AND 2004
- --------------------------------------------------------------------------------
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
STOCK-BASED COMPENSATION - CONTINUED
SFAS 123R requires forfeitures to be estimated at the time of grant and
revised, if necessary, in subsequent periods if actual forfeitures differ
from initial estimates. Stock-based compensation expense was recorded net of
estimated forfeitures for the quarter ended June 30, 2005 such that expense
was recorded only for those stock-based awards that are expected to vest.
Previously under APB 25 to the extent awards were forfeited prior to vesting,
the corresponding previously recognized expense was reversed in the period of
forfeiture. If the fair value based method under FAS 123 had been applied in
measuring stock-based compensation expense for the six-month period ended
June 30, 2004, the pro forma on net income and net income per share would
have been as follows, as previously disclosed:
Quarter ended
---------------
June 30, 2004
Net Income, as reported $ 4,689,899
Add: Stock based employee compensation expense included
in reported net income, net of related tax effects 7,250
Deduct: Total Stock-based employee compensation expense
determined under fair-value based method
for all awards not included in net income (76,581)
-----------
Pro-forma net income $ 4,620,568
-----------
Income per share:
Basic and diluted - as reported $ 0.03
-----------
Basic and diluted - proforma $ 0.03
-----------
RESEARCH AND DEVELOPMENT
Research and development costs related to present and future products are
charged to operations in the year incurred. The sale of prototypes is offset
against research and development costs.
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.
F-10
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TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED - EXPRESSED IN US DOLLARS)
JUNE 30, 2005 AND 2004
- --------------------------------------------------------------------------------
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
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.
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, 2005
and 2004.
LEGAL FEES
The Company expenses legal fees in connection with litigation as incurred.
F-11
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TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED - EXPRESSED IN US DOLLARS)
JUNE 30, 2005 AND 2004
- --------------------------------------------------------------------------------
2. SHARE CAPITAL
Transactions not disclosed elsewhere in these consolidated interim nancial
statements are as follows:
a) Authorized Capital
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. 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. Prior to this increase in authorized capital,
the Company's potentially diluted common shares exceeded the authorized
shares. Immediately prior to the increase in authorized capital, the
Company had recorded $2,134,322 in accrued liabilities to account for the
potential cash settlement of these financial instruments. As of June 30,
2004, the Company has reversed the $2,134,322 accrued liabilities since
the potentially diluted common shares do not exceed authorized capital.
b) 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, 2005 45,175 of Series X preferred
shares convertible into 4,517,500 common shares are outstanding.
c) During the six months ended June 30, 2005, the Company issued 11,516,400
shares of common stock, 10,816,400 for exercise of options and 700,000 for
conversion of 7,000 preferred shares.
d) Stock Options The following summarizes information relating to stock
options during 2005:
2005
NON-EMPLOYEES EMPLOYEES TOTAL
----------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
Outstanding at
beginning of 4,651,666 $ 0.11 10,277,000 $ 0.11 14,928,666 $ 0.11
period
Granted 1,300,000 0.02 18,700,000 0.02 20,000,000 0.02
Expired (155,000) 0.23 (3,413,600) 0.08 (3,568,600) 0.09
Exercised (1,300,000) 0.02 (9,516,400) 0.02 (10,816,400) 0.02
---------------------------------------------------------------------------
Outstanding at
end of
Period 4,496,666 0.12 16,047,000 0.06 20,543,666 0.07
---------------------------------------------------------------------------
Options
exercisable at
end of period 4,496,666 $ 0.12 16,047,000 $ 0.06 20,543,666 $ 0.07
===========================================================================
Weighted average
fair value of
options
Granted during
the Period -- $ 0.02 -- $ 0.02 -- $ 0.02
===========================================================================
F-12
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TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED - EXPRESSED IN US DOLLARS)
JUNE 30, 2005 AND 2004
- --------------------------------------------------------------------------------
2. SHARE CAPITAL - CONTINUED
d) Stock Options - Continued
As of June 30, 2005, there were no unrecognized compensation costs since
all options granted under the stock option plans were completely vested.
Also, the options outstanding did not have an intrinsic value since the
exercise price of all options is greater than the current market price.
2005 STOCK INCENTIVE PLAN
On January 11, 2005, the Company established the 2005 Nevada stock
incentive plan (the "2005 Plan). Under the 2005 Plan, the Company may
grant common stock or incentive stock options to its directors, officers,
employees and consultants for up to 20,000,000 shares. The maximum term of
the 2005 Plan is ten years. The Board of Directors will determine the
terms and matters relating to any awards under the 2005 Plan including the
type of awards, the exercise price of the options and the number of common
shares granted. The value of the shares of common stock used in
determining the awards shall not be less than 70% of the fair market value
of the common shares of the Company on the date of grant. As of June 30,
2005 the number of unoptioned shares available for granting under the plan
was 2,176,000.
2004 STOCK INCENTIVE PLAN
On April 8, 2004, the Company established the 2004 Nevada stock incentive
plan (the "2004 Plan"). Under the 2004 Plan, the Company may grant common
stock or incentive stock options to its directors, officers, employees and
consultants for up to 15,000,000 shares. The maximum term of the 2004 Plan
is ten years. The Board of Directors will determine the terms and matters
relating to any awards under the 2004 Plan including the type of awards,
the exercise price of the options and the number of common shares granted.
The value of the shares of common stock used in determining the awards
shall not be less than 85% of the fair market value of the common shares
of the Company on the date of grant. As of June 30, 2005 the number of
unoptioned shares available for granting under the plan was 1,703,500.
2003 STOCK INCENTIVE PLAN
On August 12, 2003, the Company established the 2003 Stock Incentive Plan
(the "2003 Plan"). Under the 2003 Plan, the Company may grant common stock
or incentive stock options to its directors, officers, employees and
consultants for up to 15,000,000 shares. The maximum term of the 2003 Plan
is ten years. The Board of Directors will determine the terms and matters
relating to any awards under the 2003 Plan including the type of awards,
the exercise price of the options and the number of common shares granted.
The value of the shares of common stock used in determining the awards
shall not be less than 85% of the fair market value of the common shares
of the Company on the date of grant. As of June 30, 2005, the number of
unoptioned shares available for granting of options under the plan was
7,197,759.
F-13
- --------------------------------------------------------------------------------
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED - EXPRESSED IN US DOLLARS)
JUNE 30, 2005 AND 2004
- --------------------------------------------------------------------------------
2. SHARE CAPITAL - CONTINUED
GRANT OF STOCK OPTIONS TO NON-EMPLOYEES FOR SERVICES
The Company has recorded $41,991 of compensation expense relating to stock
options issued to non-employees. Included in compensation expense is
$39,629 for services rendered during the six months ended June 30, 2005.
Upon our adoption of SFAS(R), we recorded $2,362 of compensation costs
relating to stock options granted to directors. There was no such expense
recorded during our fiscal year 2004.
The per share weighted average fair value of stock options expensed in the
six-month period ended June 30, 2005 was $0.01, $0.02 and $0.04 on the
date of grant using the Black-Scholes option-pricing model with the
following weighted average assumptions in 2005: expected dividend yield
Nil%; expected volatility of 141%, 159% and 163%; risk-free interest rate
of 2.89% and 3.75%, and expected life of 1 year and 5 years.
GRANT OF STOCK OPTIONS TO EMPLOYEES FOR SERVICES
Prior to January 1, 2005, the Company accounted for employee stock-based
compensation using the intrinsic value method supplemented by pro forma
disclosures in accordance with APB 25 and SFAS 123 "Accounting for
Stock-Based Compensation" ("SFAS 123"), as amended by SFAS No.148
"Accounting for Stock-Based Compensation--Transition and Disclosures."
Under the intrinsic value method, compensation cost is measured as the
excess of, if any, of the market price of the Company's common stock at
the date of grant, or at any subsequent measurement date, over the amount
an employee must pay to acquire the stock. Such amounts are amortized as
compensation expense over the vesting period of the related stock options.
Under the intrinsic value method, the Company was not required to
recognize stock-based compensation.
Effective January 1, 2005 the Company adopted SFAS 123R using the modified
prospective approach and accordingly prior periods have not been restated
to reflect the impact of SFAS 123R. Under SFAS 123R, stock-based awards
granted prior to its adoption will be expensed over the remaining portion
of their vesting period. These awards will be expensed under the
accelerated amortization method using the same fair value measurements
which were used in calculating pro forma stock-based compensation expense
under SFAS 123. For stock-based awards granted on or after January 1,
2005, the Company will amortize stock-based compensation expense on a
straight-line basis over the requisite service period, which is generally
a five-year vesting period.
Upon our adoption of SFAS(R), we recorded $141,752 of compensation costs
relating to stock options granted to employees. The amounts recorded
represent equity-based compensation expense related to options that were
issued in January 2005. The compensation costs are based on the fair value
at the grant date. There was no such expense recorded during our fiscal
year 2004.
F-14
- --------------------------------------------------------------------------------
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED - EXPRESSED IN US DOLLARS)
JUNE 30, 2005 AND 2004
- --------------------------------------------------------------------------------
2. SHARE CAPITAL - CONTINUED
The per share weighted average fair value of stock options granted to
employees during 2005 was $0.02, calculated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions in 2005: expected dividend yield Nil%; expected volatility
from 163%; risk-free interest rate of 3.75%; and an expected life of 5
years. Effective from the date of the option repricing, the Company
regularly remeasures compensation expense for the options where there has
been a substantive change and modification to such options. No
compensation expense was recorded as a result of repricing of options in
the prior years.
e) Stock Purchase Warrants
At June 30, 2005, the Company had 10,346,943 stock purchase warrants
outstanding. These warrants were issued in connection with private
placements and other means of financing.
Details of share purchase warrants issued and expired during the six-month
period ended June 30, 2005 are as follows:
Weighted
Average
Exercise
Warrants price
---------------- -----------
Outstanding at January 1, 2005 15,084,922 $0.30
Expired 4,737,979 $0.50
--------------- -----------
Outstanding at June 30, 2005 10,346,943 $0.20
---------------- -----------
WARRANT EXPIRATION DATE EXTENSION
In November 2004, the Company extended the term for 3,564,273 warrants
outstanding by one year previously expiring as follows:
Exercise Price Number Expiration Date
--------------- -------------------- -------------------
$0.12 1,100,000 April 11, 2006
$0.22 464,273 July 2, 2005
$0.22 2,000,000 June 24, 2005
--------------- -------------------- -------------------
3,564,273
--------------- -------------------- -------------------
The warrants were extended for a financing fee provided to the Company in
prior periods and were valued at $122,635 using the Black-Scholes
option-pricing model with the following assumptions in 2005: expected
dividend yield Nil%; expected volatility of 117%; risk-free interest rate
of 2.18% and an expected life of one year. The full value of the warrants
was included in accrued liabilities as at June 30, 2005.
F-15
- --------------------------------------------------------------------------------
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED - EXPRESSED IN US DOLLARS)
JUNE 30, 2005 AND 2004
- --------------------------------------------------------------------------------
3. TERM DEBTS
During the quarter ended September 30, 2004, the Company entered into a loan
agreement collateralized by an automobile for an aggregate of $36,035. The
loan bears interest at 6.64%, paid monthly, and the last payment is due
August 4, 2009.
Subsequent June 30, 2005 the Company was unable to make the payments so
the bank repossessed the automobile and sold it at auction. After the sale
there is a remaining liability of $17,428, which is the difference
between the note payable and the sales price and is included in
accounts payable.
During 2004, the Company returned an asset that was not in use as a
settlement of outstanding term debt and recorded a gain on the debt
settlement of $43,360.
- --------------------------------------------------------------------------------
4. 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 4(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.
The Company and TST entered a settlement agreement and release. Under the
terms of the agreement, the Company:
i) Issued 1,000,000 shares of common stock to the president of TST and
agreed to register the resale of these shares by filing a registration
statement with the Securities and Exchange Commission; valued at
$350,000 based on the common share trading price at the date the
agreement was entered into;
ii) Issued 2,000,000 shares of common stock to TST; valued at $700,000
based on the common share trading price at the date the agreement was
entered into;
iii) 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
F-16
- --------------------------------------------------------------------------------
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED - EXPRESSED IN US DOLLARS)
JUNE 30, 2005 AND 2004
- --------------------------------------------------------------------------------
4. COMMITMENTS AND CONTINGENCIES - CONTINUED
TST, Inc.- Continued
iv) 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 has reduced the provision for lawsuit
settlement by $23,345. At June 30, 2005, the Company has included
$4,898,488 (December 31, 2004 - $4,766,656) in regard to this matter
in provision for lawsuit settlements. If it is determined that TST
received payment in preference to other creditors before Pacific Baja
filed its Chapter 11 petition in bankruptcy, TST will likely increase
its claim by $2,130,000, which is included in the provision for
lawsuit settlements.
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 Trust is seeking, among other matters:
i) the re-characterization of Company advances to Pacific Baja as equity
and the subordination of unsecured claims against Pacific Baja;
ii) the re-conveyance of an aggregate of up to approximately $7,190,000
transferred by Pacific Baja to the Company on the basis of an
allegation of fraudulent transfer;
iii) an order that the Company is liable for all of the previous debts of
Pacific Baja totaling approximately $7,000,000; and
iv) damages and punitive damages against the Company and certain former
officers and directors and the former officers and directors of
Pacific Baja in the amount of up to approximately $12,000,000 based on
various allegations of fraud, misrepresentation, breach of contract,
alter ego and negligence.
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.
F-17
- --------------------------------------------------------------------------------
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED - EXPRESSED IN US DOLLARS)
JUNE 30, 2005 AND 2004
- --------------------------------------------------------------------------------
4. COMMITMENTS AND CONTINGENCIES - CONTINUED
b) Pacific Baja Bankruptcy - Continued 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.
c) Honeywell International, Inc.
We entered into the Settlement Agreement with Honeywell effective January
23, 2004. The Settlement Agreement resolved disputes between us and
Honeywell that were the subject of arbitration proceedings initiated by
Honeywell in June 2001 (the "Arbitration") and federal litigation
commenced by us against Honeywell in August 2001 (the "Federal
Litigation"). Honeywell agreed to pay us the aggregate amount of
$8,500,000 in full settlement of our claims against Honeywell subject to
$2,125,000 of contingency legal fees, $60,000 of legal costs, and $911,030
owed to certain of our creditors and lien holders. The Directors also
elected to pay the following amounts directly from settlement proceeds:
$633,070 owed to note holders and $1,290,000 in bonuses to officers and
employees. We received $3,480,900 ($4,770,900 less $1,290,000) which is
the full settlement amount less legal fees, creditor liens, note payments
and settlement bonuses. The Settlement Agreement also includes mutual
releases of our Company and Honeywell in favor of the other and certain
indemnification agreements. No payments were required to be made by us to
Honeywell pursuant to the Settlement Agreement.
d) Former Officer
On May 20, 2004, one of the Company's former officers, Mr. Peter Hofbauer,
filed a motion against the Company alleging that the Company failed to pay
him the sum of $369,266 pursuant to the terms of a purported settlement
agreement, allegedly made for the purposes of settling amounts owed to the
former officer for services to the Company. On August 3, 2004 a writ of
attachment was applied to the Company's Certificate of Deposit for
$315,000. On October 25, 2004 the former officer and the Company signed
and filed with the court a Stipulation re: Settlement and Order. The
stipulation ordered the Company to deliver 4,000,000 shares of common
stock without restrictions to be used by the former officer to raise funds
to settle amounts owed to him by the Company. As funds are raised to
settle amounts owed, writs will be reversed from the Certificate of
Deposit. If the funds raised are not adequate to settle amounts owed, the
Company will be obligated to issue further shares to the former officer in
order to settle amounts owed.
During 2004 the Company issued the 4,000,000 shares. Mr. Hofbauer has sold
2,600,000 shares and released $125,000 of the Certificate of Deposit. On
June 7, 2005 Mr. Hofbauer claimed the remaining $210,496 in the
Certificate of Deposit. The remaining 1,400,000 shares are to be returned
to the Company.
F-18
- --------------------------------------------------------------------------------
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED - EXPRESSED IN US DOLLARS)
JUNE 30, 2005 AND 2004
- --------------------------------------------------------------------------------
4. COMMITMENTS AND CONTINGENCIES - CONTINUED
e) 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, 2005, the Company
has included $405,785 in regard to this matter in the provision for
lawsuit settlements.
f) 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.
- --------------------------------------------------------------------------------
5. SUBSEQUENT EVENT
New management took control pursuant to a merger completed as of September 9,
2005 pursuant to which a majority owned subsidiary of Aspatuck Holdings Ltd.
("Aspatuck") was merged into our newly formed wholly owned subsidiary. Prior
to the merger, this subsidiary of Aspatuck entered into a consulting
agreement ("Consulting Agreement") with Stamford Research, LLC that is
obligated to provide the services of Mr. Albert Case to the Company. Upon
completion of the merger, 139,192,222 shares of the Company's Common Stock
were issuable to holders of the subsidiary of Aspatuck and 1,300,000 such
shares became issuable to Stamford Research LLC, under the Consulting
Agreement. At this time Mr. Albert Case became president and chief executive
officer and Mr. Jason Meyers, principal shareholder of Aspatuck, became
Chairman of the Board of Directors. Additional shares are issuable to the
former shareholders of the Aspatuck subsidiary in the event the Company
issues any securities related directly or indirectly to pre-merger events.
- --------------------------------------------------------------------------------
F-19
14
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-QSB, 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-QSB
are in U.S. dollars unless otherwise stated.
GENERAL
We are filing this quarterly report on Form 10-QSB late. Information contained
herein is as of June 30, 2005 and, in some instances, as of July or August 2005
or the latest practicable date for these items. Where appropriate the Company
has supplied additional information to discuss subsequent events.
At the time this late-filed document was prepared, the person who had been Chief
Executive Officer and Chief Financial Officer was no longer with the Company. No
prior corporate officers or Directors participated in the preparation of this
document. The non-financial portion of this document is a re-construction of
events from records remaining with the Company after the departure of prior
management and was prepared by new management with some assistance of prior
employees.
OVERVIEW
As discussed below, we suspended our business operations in April 2005 due to a
lack of funds.
-2-
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. The traditional engineered solution for this problem
is to 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 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. If we obtain financing we intend to continue the
development of our products.
RECENT AND POST QUARTER CORPORATE DEVELOPMENTS
We suspended business in April 2005. While we were in operations for the quarter
ended March 31, 2005, the operations were limited by a lack of funds, which led
to the suspension of our business. Set forth below are recent corporate
developments:
1. We became unable to sustain our business operations due to a lack of
financing and our working capital deficit. In March 2005 we laid off
our employees and vacated our premises and relinquished the majority
of the fixed assets to the landlord to sell and offset against rent
payable.
2. On June 7, 2005 the Company's remaining cash was claimed in
connection with a litigation settlement and prior attachment.
3. We have also suspended work on the development of our products and
technologies as part of the suspension of our business operations.
PLAN OF OPERATIONS
Our plan of operations in April 2005 was to obtain the necessary financing to
resume our business operations. In addition to the financing for our operations
and development of our products we intend to use financing to:
1. settle all legal proceedings that are currently against us, as
disclosed in Item 3 of Part I of our Annual Report on Form 10-KSB
for the year ended December 31, 2004. Our objective is to remove the
uncertainty and potential liabilities associated with these legal
proceedings. There is no assurance that we will be successful;
2. negotiate our outstanding accounts payable and accrued liabilities
with our creditors. If we are unable to obtain financing we may need
to seek relief under the appropriate statutes.
-3-
SUBSEQUENT CHANGE OF CONTROL AND NEW EFFORTS
On September 9, 2005 a majority owned subsidiary of Aspatuck Holdings Ltd.
("Aspatuck") was merged into our newly formed wholly owned subsidiary pursuant
to an AGREEMENT AND PLAN OF MERGER (the "Agreement"). Prior to the merger, this
subsidiary of Aspatuck entered into a consulting agreement ("CONSULTING
AGREEMENT") with Stamford Research LLC, which is obligated to provide the
services of Albert Case to the Company. Upon completion of the merger,
139,192,222 shares of the Company's Common Stock were issuable to holders of the
subsidiary of Aspatuck and 1,300,000 such shares became issuable to Stamford
Research LLC, under the Consulting Agreement. At this time Mr. Albert Case
became President and Chief Executive Officer and Mr. Jason Meyers, principal
shareholder of Aspatuck, became Chairman of the Board of Directors. Additional
shares are issuable to the former shareholders of the Aspatuck subsidiary when
the Company issues any securities related directly or indirectly to pre-merger
events.
The new management has obtained some additional financing and has resumed
limited business activity including:
o Updating our financial statements and required SEC filings
o Assessment of our technology including patents and other rights
o Limited development of our Turbopac(TM) product line...
o Review and negotiate to settle outstanding litigation and liabilities.
o Formulating business and marketing plans
There is no assurance we will be able to obtain sufficient financing to
implement full scale operations.
RESULTS OF OPERATIONS
SECOND QUARTER AND SIX MONTHS SUMMARY
------------------------------------------------ ---------------------------------------
Second Quarter Ended June 30 Six Months Ended June 30
------------------------------------------------ ---------------------------------------
Percentage Percentage
Increase Increase
2005 2004 (Decrease) 2005 2004 (Decrease)
------------ ------------ ------------- ----------- ----------- ------------
Total Income $ 5,556 $ 5,556 Nil $ 11,112 $ 11,112 Nil
Operating Expenses
($ 734,213) ($1,049,689) (30%) ($1,336,681) ($1,741,802) (23%)
Net Loss from Operations
($ 728,657) ($1,044,133) (30%) ($1,325,569) ($1,730,690) (23%)
Other Income (Expenses) $ 663 ($ 413) 261% $ 1,577 $ 6,420,589 (100%)
=========== =========== =========== =========== =========== ===========
Net Income (Loss)
($ 727,994) ($1,044,546) 30% ($1,323,992) $ 4,689,899 (128%)
=========== =========== =========== =========== =========== ===========
-4-
The decrease in the net operating loss for the second quarter ended June 30,
2005 is due to substantially reduced expenses as a result of the suspension of
our operations in April 2005. The decrease in our net income for the six months
ended June 30, 2005 as compared to 2004 was primarily because we recorded a one
time recovery related to the Honeywell settlement in the amount of $6,375,000
under Other Income for the six months ended June 30, 2004 but had no significant
Other Income in the comparable quarter of 2005. Our continued net losses from
operations reflect our continued operating expenses and our inability to
generate revenues
NET REVENUE
-------------------------------------------- -----------------------------------------------
Second Quarter Ended June 30 Six Months Ended June 30
-------------------------------------------- -----------------------------------------------
Percentage Percentage
2005 2004 Increase / 2005 2004 Increase /
(Decrease) (Decrease)
------------- --------------- -------------- ---------------- --------------- --------------
License Fee $5,556 $5,556 Nil $11,112 $11,112 Nil
During the year ended December 31, 2003, $400,000 in license fees were deferred
and amortized over 18 years. As a result, as of June 30, 2005, $5,556 ($5,556 -
2004) of licensing fees were recognized as income. Corporate revenues will
depend on our ability to perform effective operations.
COSTS OF SALES
We had no sales in 2004 and 2005; therefore we did not have any costs of sales
during any portion of these years.
OPERATING EXPENSES
The primary components of our operating expenses are outlined in the table
below:
------------------------------------- -------------------------------------------
Second Quarter Ended June 30 Six Months Ended June 30
------------------------------------- -------------------------------------------
Percentage Percentage
Increase Increase
2005 2004 (Decrease) 2005 2004 (Decrease)
--------- ------------- ------------- -------------- -------------- -------------
Selling, General and
Administrative Expenses $200,742 $262,579 (24%) $326,763 ($37,314) 976%
Research and Development
Expenses $161,049 $257,865 (38%) $371,486 $454,250 (18%)
Litigation Expenses $371,102 $514,732 (28%) $628,184 $1,295,840 (52%)
-5-
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
The decrease in our selling, general and administrative expenses, for the second
quarter ended June 30, 2005, is due to substantially reduced expenses as a
result of the suspension of our operations in April 2005. The increase for the
six months ended June 30, 2005 is due to the 2004 adjustment of the authorized
capital deficiency. Through March 2005 general and administrative costs included
expenses associated with our Carpinteria, California office, management
compensation, administrative staff and overhead.
RESEARCH AND DEVELOPMENT EXPENSES
The decrease in research and development costs for the second quarter ended June
30, 2005 and the six months then ended is due to substantially reduced expenses
as a result of the suspension of our operations in April 2005. 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 the six months ended June 30, 2005 are associated with the development of
our Turbopac product.
LITIGATION EXPENSE
We had litigation expenses of $371,102 during the second quarter ended June 30,
2005. The most significant components of our litigation expense were the accrual
of a potential liability related to employment and potential legal fees for
contingent liabilities.
We included in litigation expense items paid from the Honeywell settlement for
the three months ended March 31, 2004. We had litigation expenses of $371,102
during the second quarter ended June 30, 2005. The most significant components
of our litigation expense were the accrual of a potential liability related to
employment and potential legal fees for contingent liabilities.
We included in litigation expense items paid from the Honeywell settlement for
the three months ended March 31, 2004. Honeywell agreed to pay us the aggregate
amount of $8,500,000 in full settlement of our claims against Honeywell subject
to $2,125,000 of contingency legal fees, $60,000 of legal costs, and $1,290,000
in bonuses to officers and employees. Our litigation expenses are attributable
to our involvement in several ongoing legal proceedings. Litigation expenses
during the balance of 2005 are anticipated to consist primarily of legal
expenses relating to the proceedings involving our former subsidiary, Pacific
Baja.
Our litigation expenses are attributable to our involvement in several ongoing
legal proceedings. Litigation expenses during the balance of 2005 are
anticipated to consist primarily of legal expenses relating to the proceedings
involving our former subsidiary, Pacific Baja.
STOCK BASED COMPENSATION
Stock based compensation included in expenses was $119,365 for the second
quarter ended June 30, 2005 and $183,743 for the six months ended June 30, 2005.
The method by which we account for stock based compensation is discussed below
under "Critical Accounting Policies".
-6-
FINANCIAL CONDITION
CASH AND WORKING CAPITAL
------------------- ---------------------- -----------------------
At June 30, 2005 At December 31, 2004 Percentage
Increase / (Decrease)
------------------- ---------------------- -----------------------
Current Assets $1,730 $51,670 (97%)
Current Liabilities ($9,369,510) ($8,680,295) 8%
Working Capital Deficit ($9,367,780) ($8,628,625) 9%
=================== ====================== =======================
We had cash of $458 as of June 30, 2005, compared with cash of $1,615 as of
December 31, 2004. The increase to our working capital deficit was primarily
attributable to an increase in accounts payable, accrued liabilities and
provision for lawsuit settlements as discussed below.
LIABILITIES
------------------ ---------------------- -------------
At June 30, 2005 At December 31, 2004 Percentage
Increase
------------------ ---------------------- -------------
Provisions for Lawsuit
Settlements $6,300,273 $6,013,198 5%
Accounts Payable $2,375,177 $2,226,102 7%
Accrued Liabilities $512,935 $285,935 79%
Short-Term Loans $148,600 $148,600 Nil
Our accounts payable and accrued liabilities remain substantial due to our
inability to generate revenues and our limited ability to raise capital to fund
our operations. Payment of these liabilities is contingent on new funding being
received that would enable us to make payment to the creditors. Our ability to
continue our operations is also conditional upon the forbearance of our
creditors.
The increase in accrued liabilities is primarily from the accrual of a potential
liability related to employment and potential legal fees for contingent
liabilities.
Short term loans are unsecured, non-interest bearing advances that we anticipate
will be converted into shares of our common stock and share purchase warrants.
These loans have not been converted to date.
-7-
CASH FLOWS
-------------------------------
Six Months Ended June 30
-------------- ----------------
2005 2004
---- ----
Net Cash from (used in) Operating Activities ($189,180) $1,535,446
Net Cash from (used in) Investing Activities Nil ($83,271)
Net Cash from (used in) Financing Activities $188,023 ($504,938)
Net Increase (decrease) in Cash During Period ($1,157) $947,237
============== ===============
The decrease in cash used in operating activities was due to the 2004 use of the
Honeywell settlement proceeds to decrease liabilities for the six months ended
June 30, 2004 and the fact that we had almost no cash to use in 2005.
CASH FROM FINANCING ACTIVITIES
The increase in the cash from financing activities is due to the exercise of
option in 2005 and the loan payments in 2004.
FINANCING REQUIREMENTS
We will require further financing if we are to resume our business operations.
We anticipate that any future financing will be achieved by sales of additional
shares of our common stock or other equity securities. These sales will result
in significant dilution to our current stockholders. In the event that we are
unable to raise additional financing on acceptable terms, then we may not be
able to resume our business operations.
We anticipate that we will continue to incur losses until such time as the
revenues we are able to generate from sales or licensing our products exceed our
increased operating expenses. We base this, in part, on the fact that we will
incur substantial expenses as we resume and increase business activity. We do
not believe we will generate offsetting revenues for some period of time after
resuming full scale development. Moreover, there is no assurance that we will
generate revenues that exceed these expenses.
GOING CONCERN
We currently have minimal cash and working capital resources. We do not have
adequate financial resources to enable us to resume or continue our business
operations without additional financing. Our current sources of working capital
are not sufficient for us to resume business operations. We may not be able to
obtain additional financing on acceptable terms, or at all. Accordingly, there
is substantial doubt about our ability to continue as a going concern.
-8-
Our consolidated interim financial statements included with this Quarterly
Report on Form 10-QSB have been prepared assuming that we will continue as a
going concern. We have suffered net losses in recent periods resulting in an
accumulated deficit of $128,891,075 at June 30, 2005. We have used cash in our
operating activities in recent periods, have disposed of our most significant
subsidiary through bankruptcy, and are subject to lawsuits brought against us by
shareholders and other parties. Based on our projected cash flows for the
ensuing year, we will be required to obtain additional equity or debt financing
in order to continue our present operations, irrespective of the amounts paid or
to be paid, if any, in connection with the aforementioned lawsuits.
CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America. As
such, some accounting policies have a significant impact on the amount reported
in these financial statements. A summary of those significant accounting
policies can be found in the Summary of Significant Accounting Policies in our
consolidated audited financial statements included in our Annual Report on Form
10-KSB for the year ended December 31, 2004, as filed with the SEC on July 7,
2006. Note that our preparation of this Quarterly Report on Form 10-QSB requires
us to make estimates and assumptions that affect the reported amount of assets
and liabilities, disclosure of contingent assets and liabilities at the date of
our financial statements, and the reported amounts of revenue and expenses
during the reporting period. There can be no assurance that actual results will
not differ from those estimates. We believe our most critical accounting
policies include stock-based compensation and legal contingencies as explained
below.
SUBSTANTIAL DOUBT AS TO OUR ABILITY TO CONTINUE AS A GOING CONCERN
Our audited consolidated financial statements included with this Annual Report
on Form 10-KSB have been prepared assuming that we will continue as a going
concern. We have suffered net losses in recent periods resulting in an
accumulated deficit of $128,891,075 at June 30, 2005, have used cash in our
operating activities in recent periods, have disposed of our most significant
subsidiary through bankruptcy, are subject to lawsuits brought against us by
shareholders and other parties, and based on our projected cash flows for the
ensuing year, we are required to seek additional equity or debt financing in
order to resume operations, irrespective of the amounts paid or to be paid, if
any, in connection with the aforementioned lawsuits.
STOCK BASED COMPENSATION
Prior to January 1, 2005, the Company accounted for employee stock-based
compensation using the intrinsic value method supplemented by pro forma
disclosures in accordance with APB 25 and SFAS 123 "Accounting for Stock-Based
Compensation" ("SFAS 123"), as amended by SFAS No.148 "Accounting for
Stock-Based Compensation--Transition and Disclosures." Under the intrinsic value
based method, compensation cost is the excess, if any, of the quoted market
price of the stock at grant date or other measurement date over the amount an
employee must pay to acquire the stock. Under the intrinsic value method, the
Company has recognized stock-based compensation common stock on the date of
grant.
-9-
Effective January 1, 2005 the Company adopted SFAS 123R using the modified
prospective approach and accordingly prior periods have not been restated to
reflect the impact of SFAS 123R. Under SFAS 123R, stock-based awards granted
prior to its adoption will be expensed over the remaining portion of their
vesting period. These awards will be expensed under the accelerated amortization
method using the same fair value measurements which were used in calculating pro
forma stock-based compensation expense under SFAS 123. For stock-based awards
granted on or after January 1, 2005, the Company will amortize stock-based
compensation expense on a straight-line basis over the requisite service period,
which is generally a five-year vesting period.
SFAS 123R requires forfeitures to be estimated at the time of grant and revised,
if necessary, in subsequent periods if actual forfeitures differ from initial
estimates. Stock-based compensation expense was recorded net of estimated
forfeitures for the six-month period ended June 30, 2005 such that expense was
recorded only for those stock-based awards that are expected to vest. Previously
under APB 25 to the extent awards were forfeited prior to vesting, the
corresponding previously recognized expense was reversed in the period of
forfeiture.
REVENUE RECOGNITION
Prior to the suspension of our operations, we recognized revenue upon shipment
of product. Since the re-commencement of operations, we recognize license and
royalty fees over the term of the license or royalty agreement. The proceeds
from the sale of prototypes are recognized, upon shipment of the prototype, as a
reduction of the research and development expense.
RESEARCH AND DEVELOPMENT
Research and development costs related to present and future products are
charged to operations in the year incurred. The proceeds from the sale of
prototypes are recognized, upon shipment of the prototype, as a reduction of the
research and development expense.
NEW ACCOUNTING PRONOUNCEMENTS
In December 2004, FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets an
amendment of APB Opinion No. 29. SFAS 153 addresses the measurement of exchanges
of nonmonetary assets. It eliminates the exception from fair value measurement
for nonmonetary exchanges of similar productive assets in paragraph 21(b) of APB
Opinion No. 29, Accounting for Nonmonetary Transactions, and replaces it with an
exception for exchanges that do not have commercial substance. This Statement
specifies that a nonmonetary exchange has commercial substance if the future
cash flows of the entity are expected to change significantly as a result of the
exchange. SFAS 153 is effective for monetary asset exchanges occurring in fiscal
periods beginning after June 15, 2005. The Company is considering the provisions
of SFAS No. 153 and its effect on nonmonetary exchanges in the future.
-10-
In May 2005, FASB issued SFAS No. 154, Accounting Changes and Error Corrections,
a replacement of APB Opinion No. 20 and FASB Statement No. 3. SFAS 154 applies
to all voluntary accounting principle changes as well as the accounting for and
reporting of such changes. SFAS 154 is effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15, 2005.
SFAS 154 requires voluntary changes in accounting principle be retrospectively
applied to financial statements from previous periods unless such application is
impracticable. Changes in depreciation, amortization, or depletion for
long-lived, non-financial assets are accounted for as a change in accounting
estimate that is affected by a change in accounting principle, under the newly
issued standard.
SFAS 154 replaces APB Opinion No. 20 and SFAS 3. SFAS 154 carries forward many
provisions of Opinion 20 and SFAS 3 without change including those provisions
related to reporting a change in accounting estimate, a change in reporting
entity, correction of an error and reporting accounting changes in interim
financial statements. The FASB decided to completely replace Opinion 20 and SFAS
3 rather than amending them in keeping to the goal of simplifying U.S. GAAP. The
provisions of SFAS No. 154 are not expected to have a material effect on the
Company's consolidated financial position or results of operation. The
provisions of SFAS No. 154 are not expected to have a material effect on the
Company's consolidated financial position or results of operation.
-11-
ITEM 3. CONTROLS AND PROCEDURES.
(A) 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. . As required by Rule 13a-15 under
the Exchange Act the Company's Chief Executive Officer and its Chief
Financial Officer reviewed and evaluated the effectiveness of the Company's
internal control over financial reporting (as defined in Exchange Act Rule
13a-15(f)), The term "internal control over financial reporting" is a process
designed by, or under the supervision of, the registrant's principal
executive and principal financial officers, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally
accepted accounting principles.
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 at yearend.
Nevertheless these controls indicated substantial weakness that must be
rectified if the Company increased operations, including a lack of
segregation of duties.
During our fiscal quarter ended June 30, 2005, the officers determined that
there were no changes in our internal control over financial reporting that
have materially affected, or are reasonably likely to affect, our internal
control over financial reporting.
-12-
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
EXHIBITS
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
- -------------- -----------------------------------------------------------------
31.1 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
32.2 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section
906 of the Sarbanes-Oxley Act of 2002.
- --------------------------------------------------------------------------------
-13-
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.
Dated: July 7, 2006 BY: /S/ ALBERT F. CASE, JR.
---------------------------
Albert F. Case, Jr,
Chief Executive Officer
BY: /S/ DEBI KOKINOS
Chief Financial Officer and
Chief Accounting Officer
-14-