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 MARCH 31, 2006
[ ] Transition Report pursuant to 13 or 15(d) of the Securities Exchange Act
of 1934
For the transition period to
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Commission File Number 000-21391
TURBODYNE TECHNOLOGIES, INC.
(Exact name of small business issuer as specified in its charter)
NEVADA 95-4699061
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
2848 SIOUX, VENTURA, CALIFORNIA 93001
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (805) 201-3133
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NOT APPLICABLE
(Former name, former address and former fiscal year end,
if changed since last report)
Check whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the issuer was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days [ ] Yes [ X ] No
State the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date: 320,559,444 shares of common stock
issued and outstanding as of JULY 3, 2006.
Transitional Small Business Disclosure Format (check one): Yes [ ] NO [X]
TURBODYNE TECHNOLOGIES, INC.
INDEX TO FORM 10-Q
MARCH 31, 2006
PAGE
NUMBER
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets as of March 31, 2006
and December 31, 2005 4
Consolidated Statements of Operations for the three month
periods ended March 31, 2006 and March 31, 2005 5
Consolidated Statements of Cash Flows for the three month
periods ended March 31, 2006 and March 31, 2005 6
Notes to the Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 17
Item 3a. Controls and Procedures 25
PART II - OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 26
Item 6. Exhibits 26
SIGNATURES 27
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PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE-MONTH PERIODS ENDED
MARCH 31, 2006 AND 2005
(UNAUDITED - EXPRESSED IN US DOLLARS)
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TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(EXPRESSED IN US DOLLARS)
MARCH 31 December 31
2006 2005
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ASSETS (UNAUDITED)
CURRENT
Cash $ 51,553 $ 100,538
Prepaid expenses and other current assets 672 672
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TOTAL CURRENT ASSETS 52,225 101,210
PROPERTY AND EQUIPMENT 1,818 2,309
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TOTAL ASSETS $ 54,043 $ 103,519
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LIABILITIES AND CAPITAL DEFICIT
LIABILITIES
CURRENT
Accounts payable $ 2,528,401 $ 2,491,259
Accrued liabilities 458,148 476,048
Provision for lawsuit settlements (Notes 4) 4,451,021 4,385,105
Loans payable 629,960 465,662
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TOTAL CURRENT LIABILITIES 8,067,530 7,818,074
DEFERRED LICENSING FEE 335,946 341,502
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TOTAL LIABILITIES 8,403,476 8,159,576
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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 preferred shares in 2006 (2005 - 45,175) 12 12
320,416,577 common shares in 2006 (2005 - 320,416,577) 320,417 320,417
Treasury stock, at cost (378,580 shares) (1,907,612) (1,907,612)
Additional paid-in capital 120,841,762 120,841,762
Other comprehensive income -
Foreign exchange translation gain 35,119 35,119
Accumulated deficit (127,639,131) (127,345,755)
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TOTAL CAPITAL DEFICIT (8,349,433) (8,056,057)
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TOTAL LIABILITIES AND CAPITAL DEFICIT $ 54,043 $ 103,519
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The accompanying notes are an integral part of these consolidated financial statements.
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TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED - EXPRESSED IN US DOLLARS)
FOR THE THREE-MONTH PERIODS ENDED MARCH 31 2006 2005
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LICENSING FEES $ 5,556 $ 5,556
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EXPENSES
Selling, general and administrative 185,557 126,021
Research and development costs 22,715 210,437
Litigation expense 85,872 257,081
Depreciation and amortization 491 8,928
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TOTAL EXPENSES 294,635 602,467
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LOSS FROM OPERATIONS (289,079) (596,911)
OTHER INCOME (EXPENSE)
Interest income -- 1,173
Interest expense (4,297) (1,030)
Loss on sale of asset -- 770
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NET LOSS $ (293,376) $ (595,998)
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NET LOSS PER COMMON SHARE - BASIC AND DILUTED $ (0.00) $ (0.00)
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WEIGHTED AVERAGE SHARES - BASIC AND DILUTED 320,416,577 164,011,132
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The accompanying notes are an integral part of these consolidated financial statements.
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TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED - EXPRESSED IN US DOLLARS)
FOR THE THREE-MONTH PERIODS ENDED MARCH 31 2006 2005
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OPERATING ACTIVITIES
Net loss for the period $(293,376) $(595,998)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Amortization of deferred licensing fees (5,556) (5,556)
Depreciation and amortization 491 8,928
Stock option compensation (Note 2) -- 104,007
(Increase) decrease in operating assets
Prepaid expenses and other current assets -- 46,383
Increase (decrease) in operating liabilities
Accounts payable 37,142 88,804
Accrued liabilities and provision for lawsuit settlements 52,314 216,794
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Net cash used in operating activities (208,985) (136,638)
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FINANCING ACTIVITIES
Notes Payable 160,000 (1,093)
Replacement of loans payable -- --
Proceeds from exercise of options -- 140,400
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Net cash provided by financing activities 160,000 139,307
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NET INCREASE (DECREASE) IN CASH (48,985) 2,669
CASH, beginning of period 100,538 1,615
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CASH, end of period $ 51,553 $ 4,284
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SUPPLEMENTARY DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period
Interest $ -- $ 692
Income taxes $ -- $ --
The accompanying notes are an integral part of these consolidated financial statements.
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TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED - EXPRESSED IN US DOLLARS)
MARCH 31, 2006 AND 2005
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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 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 into 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.
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.
The Company's operations have been financed principally through a
combination of private and public sales of debt securities. If the Company
is unable to raise equity capital or generate revenue to meet its working
capital needs, it may have to cease operating and seek relief under
appropriate statutes. These consolidated financial statements have been
prepared on the basis that the Company will be able to continue as a going
concern and realize its assets and satisfy its liabilities and commitments
in the normal course of business and do not reflect any adjustment which
would be necessary if the Company is unable to continue as a going concern.
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.
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TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED - EXPRESSED IN US DOLLARS)
MARCH 31, 2006 AND 2005
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1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
CONTINUED
BASIS OF PRESENTATION - CONTINUED
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, 2005 and 2004 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.
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 $127,639,131 at March 31, 2006 and a total capital deficit of $8,349,433
at March 31, 2006. 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.,
Electronic Boosting Systems Inc. and Pacific Baja Light Metals Corp.
("Pacific Baja"). All intercompany accounts and transactions have been
eliminated on consolidation.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization of property and equipment is computed using
the straight-line method over estimated useful lives as follows:
Machinery and equipment - 7 to 15 years
Furniture and fixtures - 5 to 10 years
LICENSES
Licenses are recorded at cost and are amortized over their estimated useful
life.
-8-
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TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED - EXPRESSED IN US DOLLARS)
MARCH 31, 2006 AND 2005
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1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
CONTINUED
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 2006 and 2005.
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
quarter ended March 31, 2006 $5,556 ($5,556 - 2005) 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 period. Diluted
earnings per share reflects the potential dilution of securities that could
share in earnings of an entity. In a loss period, 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.
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TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED - EXPRESSED IN US DOLLARS)
MARCH 31, 2006 AND 2005
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1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
CONTINUED
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.
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.
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. 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.
RESEARCH AND DEVELOPMENT
Research and development costs related to present and future products are
charged to operations in the period incurred.
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TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED - EXPRESSED IN US DOLLARS)
MARCH 31, 2006 AND 2005
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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
March 31, 2006 and 2005.
LEGAL FEES
The Company expenses legal fees in connection with litigation as incurred.
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2. SHARE CAPITAL
Transactions not disclosed elsewhere in these consolidated interim
financial statements are as follows:
a) Authorized Capital
At the Annual General Meeting held on June 30, 2004, the shareholders
approved an increase of authorized capital to 1,000,000,000 common
shares.
In 2003, 150,000 of the 1 million preferred shares were designated as
Series X preferred shares. These shares have a par value of $0.001 per
share with each share being convertible into 100 common shares at the
discretion of the holder. As of March 31, 2006 45,175 of Series X
preferred shares convertible into 4,517,500 common shares are
outstanding.
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TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED - EXPRESSED IN US DOLLARS)
MARCH 31, 2006 AND 2005
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2. SHARE CAPITAL - CONTINUED
b) During the three months ended March 31, 2006 there were no share
issuances. During the three months ended March 31, 2005, the Company
issued 8,807,400 shares of common stock, 8,107,400 for exercise of
options and 700,000 for conversion of 7,000 preferred shares.
c) Stock Options
GRANT OF STOCK OPTIONS TO NON-EMPLOYEES FOR SERVICES
The Company has recorded $0 (2005 - $40,810) of compensation expense
relating to stock options issued to non-employees for services
rendered during the period.
The per share weighted average fair value of stock options granted for
the three-months ended March 31, 2005 of $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 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.
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TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED - EXPRESSED IN US DOLLARS)
MARCH 31, 2006 AND 2005
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2. SHARE CAPITAL - CONTINUED
c) Stock Options - continued
The Company has recorded $0 (2005 - $63,197) of compensation expense
relating to stock options issued to employees. 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 of 163%;
risk-free interest rate from 3.75%; and an expected life of 5 years.
d) Stock Purchase Warrants
At March 31, 2006, the Company had 14,064,273 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
quarter ended March 31, 2006 are as follows:
Weighted
Average
Exercise
Warrants Price
-------------------------
Outstanding at December 31, 2005 11,573,510 $ 0.09
Granted 3,200,000 0.02
Expired (709,237) 0.20
-------------------------
Outstanding at March 31, 2006 14,064,273 $ 0.07
-------------------------
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3. LONG-TERM DEBT
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; the last payment of $707 is
due August 4, 2009.
Subsequent to March 31, 2005 the Company was unable to make the payments so
the bank repossessed the automobile and sold it at auction. The Company
currently owes $17,428 which is included in accounts payable.
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TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED - EXPRESSED IN US DOLLARS)
MARCH 31, 2006 AND 2005
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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.
Agreed to the immediate entry of judgment against the Company in the
amount of $2,068,078 plus interest from the date of entry at the rate
of 10% per annum. The amount of this judgment would immediately
increase by any amount that TST is compelled by judgment or court
order or settlement to return as a preferential transfer in connection
with the bankruptcy proceedings of Pacific Baja; and
TST cannot execute on its judgment until Turbodyne either: (a) files a
voluntary bankruptcy case; (b) is the subject of an involuntary case;
or (c) effects an assignment for the benefit of creditors.
Any proceeds received by TST or its president from the sale of the
issued shares will be automatically applied as a credit against the
amount of the judgment against the Company in favor of TST. Prior to
March 31, 2004, 147,000 shares issued in connection with the TST
settlement had been sold which have reduced the provision for lawsuit
settlement by $23,345.
At March 31, 2006, the Company has included $2,966,236 (December 31, 2005 -
$2,900,320) 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. TST and Pacific Baja
settled the preference payment issue with TST paying $20,000 to Pacific
Baja and TST relinquishing the right to receive $63,000, therefore, the
$2,130,000 that the Company had included in the provision for lawsuit
settlements, has been reduced to $83,000. The $2,047,000 difference has
been recorded as a lawsuit settlement income in the last quarter of 2005.
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TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED - EXPRESSED IN US DOLLARS)
MARCH 31, 2006 AND 2005
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4. COMMITMENTS AND CONTINGENCIES - LITIGATION CONTINUED
b) Pacific Baja Bankruptcy
In July 1999, a major creditor of the Company's wholly-owned major
subsidiary, Pacific Baja, began collection activities against Pacific
Baja which threatened Pacific Baja's banking relationship with, and
source of financing from, Wells Fargo Bank. As a result, Pacific Baja
and its subsidiaries commenced Chapter 11 bankruptcy proceedings on
September 30, 1999.
In September 2001, the Pacific Baja Liquidating Trust (the "Trust")
commenced action against us in the aforesaid Bankruptcy Court. The
Trust was established under the Pacific Baja bankruptcy proceedings
for the benefit of the unsecured creditors of Pacific Baja.
The Company vigorously contested the Complaint until April 22, 2005
when the Company entered into a stipulation for entry of judgment and
assignment in the Pacific Baja bankruptcy proceedings for $500,000 to
be issued in common stock or cash or a combination. Additionally the
Company assigned to the bankruptcy Trust the rights to $9,500,000
claims under any applicable directors and officers liability insurance
policies. The bankruptcy Trust also agreed to a covenant not to
execute against the Company regardless of the outcome of the insurance
claims.
The Company has completed the assignment of its insurance claims, but
has not completed the cash/stock payment that was to be paid to the
Trust by December 9, 2005. We are negotiating with the Trustee
regarding this default
c) 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. Subsequent to March 31, 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.
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TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED - EXPRESSED IN US DOLLARS)
MARCH 31, 2006 AND 2005
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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 March 31, 2006, 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.
-16-
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.
-17-
OVERVIEW
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 solutions for this problem
are 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.
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 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.
-18-
RESULTS OF OPERATIONS
-------------------------------------------
First Quarter Ended March 31
-------------------------------------------
Percentage
2006 2005 (Decrease)
---------------- ------------- ------------
Total Income $5,556 $5,556 Nil
Operating Expenses ($294,635) ($602,467) (51%)
Net Loss from Operations ($289,079) ($596,911) (52%)
Other Income (expense), net ($4,297) 913 (571%)
================ ============= ============
Net Loss ($293,376) ($595,998) (51%)
================ ============= ============
NET REVENUE
-------------------------------------------
First Quarter Ended March 31
-------------------------------------------
Percentage
2006 2005 Increase
----------------- ------------- -----------
License Fee $5,556 $5,556 Nil
================ ============= ============
We had no revenue in 2005 other than recognition of amortized license fees.
During the year ended December 31, 2003, $400,000 in license fees were deferred
and amortized over 18 years. As a result, for the three months ended March 31,
2006 and 2005, $5,556 of licensing fees was recognized as income. Our limited
receipts (not reflected as revenue) are derived for the most part from selling
"shop" versions of our product and reflect the fact that our Turbopac(TM)
products are in the development stage. During 2005, we sold one prototype for
$27,319, which reduced our research and development expenses. Our continued net
losses from operations reflect our continued operating expenses and our
inability to generate revenues. We believe that we will not be able to generate
any significant revenues from TurboPac(TM) until we complete our production
models and enter into manufacturing and sales arrangements.
COSTS OF SALES
Because we had no sales in 2006 and 2005, we did not have any costs of sales
during any portion of these years.
OPERATING EXPENSES
Operating expense decreased in first quarter 2006 substantially from the
comparable quarter in 2005. This was primarily due to our attempt to continue
operations in 2005 with significant research and litigation expense. While we
resumed operations in late 2005, we have not been able to devote substantial
amounts to research nor have we been compelled to spend substantial amounts on
litigation expenses through the first quarter of 2006.
-19-
The primary components of our operating expenses are outlined in the table
below:
----------------------------------------
First Quarter Ended March 31
----------------------------------------
Percentage
2006 2005 Increase /
(Decrease)
----------------------------------------
Selling, General and
Administrative Expenses $185,557 $126,021 47%
Research and Development Expenses $22,715 $210,437 (89%)
Litigation Expenses $85,872 $257,081 (67%)
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative costs included management compensation and overhead
and increased due to consulting fees to management.
RESEARCH AND DEVELOPMENT
The decrease in research and development costs in 2006 is due to the suspension
of our operations in April 2005 and the subsequent resumption of limited
operations. 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 2006 are associated with the development of our
Turbopac product.
LITIGATION EXPENSE
The most significant component of our litigation expense was the accrual of
interest relating to TST, Inc. settlement.
Our litigation expenses are attributable to our involvement in several ongoing
legal proceedings or the settlement of these proceedings. Litigation expenses
during the balance of 2006 are anticipated to consist primarily of legal
expenses relating to the proceedings involving our former subsidiary, Pacific
Baja and accrual of interest relating to TST, Inc.
STOCK BASED COMPENSATION
We did not rely on stock based compensation during the three month period ended
March 31, 2006. Stock based compensation included in expenses was $104,007 for
the three months ended March 31, 2005.
The method by which we account for stock based compensation is discussed below
under "Critical Accounting Policies".
-20-
FINANCIAL CONDITION
CASH AND WORKING CAPITAL
-------------------- ---------------------- ----------------------
Percentage
At March 31, 2006 At December 31, 2005 Increase / (Decrease)
-------------------- ---------------------- ----------------------
Current Assets $52,225 $101,210 (48%)
Current Liabilities ($8,067,530) ($7,818,074) 3%
Working Capital Deficit ($8,015,305) ($7,716,864) 4%
==================== ====================== ======================
The increase to our working capital deficit was primarily attributable to a
decrease in cash and an increase in accounts payable, convertible notes and
provision for lawsuit settlements as discussed below.
LIABILITIES
------------------ --------------------- ---------------------
At March 31, 2006 At December 31, 2005 Percentage
Increase / (Decrease)
------------------ --------------------- ---------------------
Provision for
Lawsuit Settlements $4,451,021 $4,385,105 2%
Accounts Payable $2,528,401 $2,491,259 1%
Accrued Liabilities $458,148 $476,048 (4%)
Short-Term Loans $629,960 $465,662 35%
Accounts payable and accrued liabilities increased due to a lack of funds to pay
creditors, short-term loans increased due to generate cash.
We continue to negotiate with our creditors for the payment of our accounts
payable and accrued liabilities. Payment of these liabilities is contingent on
new funding being received that would enable us to make payments to the
creditors. Our ability to continue our operations is also conditional upon the
forbearance of our creditors.
Included in short-term loans at March 31, 2006 are unsecured, non-interest
bearing advances of $148,600 that we anticipate will be converted into shares of
our common stock.
-21-
CASH FLOWS
------------------------------
Three Months Ended March 31
------------------------------
2006 2005
---- ----
Net Cash used in Operating Activities ($208,985) ($136,638)
Net Cash provided by Financing Activities $160,000 $139,307
Net Increase (decrease) in Cash During Period ($48,985) $2,669
The increase in cash used in operating activities was due to the fact that we
had received significant cash from financing activities since October 2005
almost no cash in 2005 and were curtailing business and in 2006 we are
attempting to resurrect the business.
FINANCING REQUIREMENTS
We will require additional financing if we are to continue as a going concern
and to finance our business operations. While we have obtained some financing in
2005 and early 2006 we need substantially more capital. We may not be able to
obtain additional working capital on acceptable terms, or at all. Accordingly,
there is substantial doubt about our ability to continue as a going concern.
We are presently in the process of negotiating to raise working capital to
finance our operations which is no assurance that we will be able to raise the
additional capital that we require to continue operations. In the event that we
are unable to raise additional financing on acceptable terms, then we may have
to cease operating and seek relief under appropriate statutes.
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. 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 have
identified certain accounting policies, described below, that are the most
important to the portrayal of our current financial condition and results of
operations.
-22-
THERE IS SUBSTANTIAL DOUBT AS TO OUR ABILITY TO CONTINUE AS A GOING CONCERN
Our reviewed consolidated 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 and have an
accumulated deficit of $127,639,131 at March 31, 2006, have used cash in our
operating activities in recent periods, 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 continue our present operations. These matters raise substantial doubt
about our ability to continue as a going concern.
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.
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 is recorded net of estimated
forfeitures such that expense is 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 in 2003, we recognized revenue upon
shipment of product. Since the re-commencement of operations in 2004, we
recognize license and royalty fees over the term of the license or royalty
agreement.
RESEARCH AND DEVELOPMENT
Research and development costs related to present and future products are
charged to operations in the year incurred.
-23-
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.
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.
-24-
ITEM 3A. 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 quarter end.
Nevertheless these controls indicated substantial weakness that must be
rectified if the Company increased operations, including a lack of segregation
of duties.
-25-
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES.
The following issuances of securities occurred during the three months ended
March 31, 2006.
During the three months ended March 31, 2006 we sold 1.6 units of our securities
in a private placement. Each unit consisted of $100,000, 5% convertible note and
warrants to purchase 2,000,000 of our shares at $0.025. The note is convertible
at any time prior to payment. The conversion price is equal to the lesser of (i)
70% of the Market Price of (but not less than $.003) or (ii) $.025 .If the
Market Price of the Common Stock is $.04 for a period of 20 consecutive trading
days then the Conversion Price shall be $.025. The shares were issued pursuant
to Section 4(2) of the Securities Act of 1933 and are exempt from the
registration requirements under that act.
ITEM 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.
- --------------------------------------------------------------------------------
-26-
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 13, 2006 BY: /S/ ALBERT F. CASE, JR.
---------------------------------------
Albert F. Case, Jr.
Chief Executive Officer
BY: /S/ DEBI KOKINOS
Debi Kokinos
Chief Financial Officer and
Chief Accounting Officer
-27-