UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB/A
(AMENDMENT NO. 1)
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended MARCH 31, 2007
[ ] Transition Report pursuant to 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period ______________ to ______________
Commission File Number 000-21391
TURBODYNE TECHNOLOGIES, INC.
- --------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
NEVADA 95-4699061
- ------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
36 E. BARNETT STREET, 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 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 [ ] No [ X ]
State the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date: 357,459,444 shares of common stock
issued and outstanding as of MAY 14, 2007.
Transitional Small Business Disclosure Format (check one): Yes [ ] NO [X]
TURBODYNE TECHNOLOGIES, INC.
INDEX TO FORM 10-QSB/A
MARCH 31, 2007
PAGE
NUMBER
------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets as of March 31, 2007 and
December 31, 2006 6
Consolidated Statements of Operations for the three month
periods ended March 31, 2007 and March 31, 2006 7
Consolidated Statements of Cash Flows for the three month
periods ended March 31, 2007 and March 31, 2006 8
Notes to the Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis or Plan of Operations 21
Item 3a. Controls and Procedures 31
PART II - OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 32
Item 6. Exhibits 32
SIGNATURES 33
2
EXPLANATORY NOTE
Turbodyne Technologies, Inc. (the "Company") is filing this Amendment No. 1 to
its Quarterly Report on Form 10-QSB for the quarterly period ended March 31,
2007 (the March 31, 2007 10-QSB), which was originally filed on May 15, 2007.
This Amendment No. 1 is being filed to restate the Company's financial
statements for the three months ended March 31, 2007 since the liabilities were
overstated, expenses and net loss were understated and additional paid in
capital was understated.
The Company is restating its previously issued consolidated financial statements
for the following reasons: unrecorded beneficial conversion feature of
convertible debt and related amortization, unrecorded value of detachable
warrants issued with the convertible debt, unrecorded debt conversion expense as
a result of Company's modification of conversion terms and terms for the
exercise of warrants to induce conversion and warrants exercise.
During the quarter ended March 31, 2007, the Company issued $325,000 convertible
notes. The notes bear interest at 5% and mature within one year from date of
issuance. The Notes are convertible, at the option of the holder, to shares of
the Company's common stock. On February 22, 2007 the Board of Directors changed
the per share conversion price from $0.005 to $0.02 for new lenders. Therefore,
$50,000 is at a conversion price per share equal to $0.005 and $275,000 is at
$0.02.
In addition, the Company issued, to the holders of convertible notes, warrants
to purchase 6,500,000 shares of the Company's common stock. The warrants have
$0.025 exercise price and expire five years from date of issuance. In accordance
with generally accepted accounting principles, the proceeds, received from debt
or convertible debt with detachable warrants, are allocated using the relative
fair value of the individual elements at the time of issuance. Using the
Black-Scholes valuations model, the aggregate value of the 6,500,000 warrants is
$290,049. Assumptions used to value the warrants: expected volatility of 155%;
risk-free interest rate of 4.46%, 4.57%, and 4.69% and an expected life of 5
years. The amount allocated to the warrants amounts to $104,413 and has been
recognized as a decrease in loans payable and an increase in additional paid in
capital.
This Amendment No. 1 does not reflect events occurring after the original filing
of the Company's March 31 2007 10-Q, and does not update or modify the
disclosures therein in any way other than as required to reflect the amendment
described above.
3
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE-MONTH PERIODS ENDED
MARCH 31, 2007 AND 2006
(UNAUDITED - EXPRESSED IN US DOLLARS)
4
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(EXPRESSED IN US DOLLARS)
MARCH 31 DECEMBER 31
2007 2006
- -------------------------------------------------------------------------------------------
ASSETS (UNAUDITED (AS RESTATED)
AND RESTATED)
CURRENT
Cash $ 89,559 $ 14,745
Prepaid expenses and other current assets 672 672
------------------------------
TOTAL CURRENT ASSETS 90,231 15,417
PROPERTY AND EQUIPMENT, net -- 537
------------------------------
TOTAL ASSETS $ 90,231 $ 15,954
===========================================================================================
LIABILITIES AND STOCKHOLDERS' DEFICIT
LIABILITIES
CURRENT
Accounts payable $ 2,152,157 $ 2,302,417
Accrued liabilities 419,793 444,193
Provision for lawsuit settlements (Note 5) 4,754,896 4,675,137
Loans payable (Note 4) 616,884 551,121
------------------------------
TOTAL CURRENT LIABILITIES 7,943,730 7,972,868
DEFERRED LICENSING FEE 313,722 319,278
------------------------------
TOTAL LIABILITIES 8,257,452 8,292,146
------------------------------
STOCKHOLDERS' DEFICIT
Share Capital (Note 3)
Authorized
1,000,000 preferred shares, par value $0.001
1,000,000,000 common shares, par value $0.001
Issued
12,175 preferred shares in 2007 and 2006 12 12
357,316,577 common shares in 2007 (2006 -
345,316,577) 357,317 345,317
Treasury stock, at cost (1,778,580 shares) (1,963,612) (1,963,612)
Additional paid-in capital 123,015,091 122,132,286
Other comprehensive income -
Foreign exchange translation gain 35,119 35,119
Accumulated deficit (129,611,148) (128,825,314)
------------------------------
TOTAL STOCKHOLDERS' DEFICIT (8,167,221) (8,276,192)
------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 90,231 $ 15,954
===========================================================================================
The accompanying notes are an integral part of these unaudited
consolidated financial statements.
5
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED - EXPRESSED IN US DOLLARS)
FOR THE THREE-MONTH PERIODS ENDED MARCH 31 2007 2006
- -----------------------------------------------------------------------------------------
(AS RESTATED)
- -----------------------------------------------------------------------------------------
LICENSING FEES $ 5,556 $ 5,556
------------------------------
EXPENSES
Selling, general and administrative 235,040 185,557
Research and development costs 80,941 22,715
Litigation expense 79,759 85,872
Depreciation and amortization 537 491
------------------------------
TOTAL EXPENSES 396,277 294,635
------------------------------
LOSS FROM OPERATIONS (390,721) (289,079)
OTHER INCOME (EXPENSE)
Interest expense (8,990) (4,297)
Amortization of discount on convertible notes (Note 4) (85,773) --
Debt conversion expense (Note 4) (422,400) --
Gain on extinguishment of debt 122,050 --
------------------------------
NET LOSS $ (785,834) $ (293,376)
=========================================================================================
NET LOSS PER COMMON SHARE - BASIC AND DILUTED $ (0.00) $ (0.00)
=========================================================================================
WEIGHTED AVERAGE SHARES - BASIC AND DILUTED 349,272,133 320,416,577
=========================================================================================
The accompanying notes are an integral part of these unaudited
consolidated financial statements.
6
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED - EXPRESSED IN US DOLLARS)
FOR THE THREE-MONTH PERIODS ENDED MARCH 31 2007 2006
- --------------------------------------------------------------------------------------------
(AS RESTATED)
OPERATING ACTIVITIES
Net loss for the period $ (785,834) $ (293,376)
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 537 491
Gain on extinguishment of debt (122,050) --
Amortization of discount on convertible debt (Note 4) 85,773 --
Debt conversion expense (Note 4) 422,400 --
Warrant compensation (Note 3) 87,405 --
(Increase) decrease in operating assets
Prepaid expenses and other current assets -- --
Increase (decrease) in operating liabilities
Accounts payable (28,210) 37,142
Accrued liabilities and provision for lawsuit
settlements 64,349 52,314
------------------------------
Net cash used in operating activities (281,186) (208,985)
------------------------------
FINANCING ACTIVITIES
Notes Payable 356,000 160,000
------------------------------
Net cash provided by financing activities 356,000 160,000
------------------------------
NET INCREASE (DECREASE) IN CASH 74,814 (48,985)
CASH, beginning of period 14,745 100,538
------------------------------
CASH, end of period $ 89,559 $ 51,553
============================================================================================
SUPPLEMENTARY DISCLOSURE OF NON-CASH INFORMATION
BENEFICIAL CONVERSION FEATURE OF CONVERTIBLE DEBT $ 220,587 $ --
============================================================================================
The accompanying notes are an integral part of these unaudited
consolidated financial statements.
7
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED - EXPRESSED IN US DOLLARS)
MARCH 31, 2007 AND 2006
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Turbodyne Technologies, Inc., a Nevada corporation, and its subsidiaries
(the "Company") engineer, develop and market products designed to enhance
performance and reduce emissions of internal combustion engines.
The Company's operations have been financed principally through a
combination of private and public sales of equity and debt securities. If
the Company is unable to raise equity capital or generate revenue to meet
its working capital needs, it may have to cease operating and seek relief
under appropriate statutes. These consolidated financial statements have
been prepared on the basis that the Company will be able to continue as a
going concern and realize its assets and satisfy its liabilities and
commitments in the normal course of business and do not reflect any
adjustment which would be necessary if the Company is unable to continue
as a going concern.
Basis of Presentation
The interim financial statements included herein, presented in accordance
with United States generally accepted accounting principles and stated in
US dollars, have been prepared by the Company, without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission and
with the instruction to Form 10-QSB and Item 310(b) of Regulation S-B..
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, 2006 and 2005 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 $129,611,148 at March 31, 2007 and a total capital deficit of
$8,167,221 at March 31, 2007. 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.
8
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(UNAUDITED - EXPRESSED IN US DOLLARS)
MARCH 31, 2007 AND 2006
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
CONTINUED
Principles of Consolidation
The accompanying consolidated financial statements, stated in United
States dollars, include the accounts of Turbodyne Technologies, Inc. and
its wholly owned subsidiaries, Turbodyne Systems, Inc., Turbodyne Germany
Ltd., Electronic Boosting Systems, Inc. and Pacific Baja Light Metals
Corp. ("Pacific Baja"). All intercompany accounts and transactions have
been eliminated on consolidation.
Depreciation and Amortization
Depreciation and amortization of property and equipment is computed using
the straight-line method over estimated useful lives as follows:
Machinery and equipment - 7 to 15 years
Furniture and fixtures - 5 to 10 years
Licenses
Licenses are recorded at cost and are amortized over the estimated useful
life of 18 years.
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 2007 and 2006.
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, 2007 $5,556 ($5,556 - 2006) of licensing fees was
recognized as income.
Prior to the suspension of our operations in 2003, we recognized revenue
upon shipment of product. Previously, research prototypes were sold and
proceeds reflected by reductions in our research and development costs. As
new technology pre-production manufacturing units are produced and related
non-recurring engineer services are delivered we will recognize the sales
proceeds as revenue.
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.
9
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(UNAUDITED - EXPRESSED IN US DOLLARS)
MARCH 31, 2007 AND 2006
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
CONTINUED
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.
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
The Company accounts for stock-based compensation under the fair value
method in accordance with Statement of Financial Accounting Standards No.
123 (revised 2004), "Share Based Payment" "SFAS 123(R)".
Research and Development
Research and development costs related to present and future products are
charged to operations in the year incurred. Previously, research prototypes
were sold and proceeds reflected by reductions in our research and
development costs. As new technology pre-production manufacturing units are
produced and related non-recurring engineer services are delivered we will
recognize the sales proceeds as revenue.
Income Taxes
The Company accounts for income taxes under the asset and liability method
of accounting for income taxes, which recognizes deferred tax assets and
liabilities for the estimated future tax consequences attributable to
differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates in effect for the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the
enactment date.
Legal Fees
The Company expenses legal fees in connection with litigation as incurred.
10
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(UNAUDITED - EXPRESSED IN US DOLLARS)
MARCH 31, 2007 AND 2006
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
CONTINUED
Comprehensive Income
The Company has adopted SFAS No. 130, "Reporting Comprehensive Income".
SFAS No. 130 establishes standards to measure all changes in equity that
result from transactions and other economic events other than transactions
with owners. Comprehensive income is the total of net earnings (loss) and
all other non-owner changes in equity. Except for net earnings (loss) and
foreign currency translation adjustments, the Company does not have any
transactions and other economic events that qualify as comprehensive
income as defined under SFAS No. 130. As foreign currency translation
adjustments were immaterial to the Company's consolidated financial
statements, net earnings (loss) approximated comprehensive income for the
quarter ended March 31, 2007 and 2006.
New Accounting Pronouncements
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities" ("SFAS 159") which permits
entities to choose to measure many financial instruments and certain other
items at fair value that are not currently required to be measured at fair
value. SFAS 159 will be effective for the Company on January 1, 2008. The
Company is currently evaluating the impact SFAS 159 may have on its
financial condition or results of operations.
In September 2006, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Issues No. 157, "Fair Value
Measurements" ("SFAS 157"), which defines the fair value, establishes a
framework for measuring fair value and expands disclosures about fair
value measurements. This statement is effective for financial statements
issued for fiscal years beginning after November 15, 2007, and interim
periods within those fiscal years. Early adoption is encouraged, provided
that the Company has not yet issued financial statements for that fiscal
year, including any financial statements for an interim period within that
fiscal year. The Company is currently evaluating the impact SFAS 157 may
have on its financial condition or results of operations.
In June 2006, the FASB released FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109
(FIN 48). FIN 48 clarifies the accounting and reporting for uncertainties
in income tax law. This interpretation prescribes a comprehensive model
for the financial statement recognition, measurement, presentation and
disclosure of uncertain tax positions taken or expected to be taken in
income tax returns. This statement is effective for fiscal years beginning
after December 15, 2006. The Company is currently evaluating the impact
FIN 48 may have on its financial condition or results of operations.
11
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(UNAUDITED - EXPRESSED IN US DOLLARS)
MARCH 31, 2007 AND 2006
2 RESTATEMENT OF FINANCIAL STATEMENTS
The Company is restating its previously issued consolidated financial
statements for the three months ended March 31, 2007 for the following
reasons: unrecorded beneficial conversion feature of convertible debt and
related amortization.
The following is a summary of the restatements for the quarter ended March
31, 2007:
Unrecorded debt conversion expense $ (255,543)
Overstatement of amortization of beneficial conversion
feature of convertible debt 107,168
----------
$ (148,375)
==========
The effect on the Company's previously issued 2007 financial statements is
summarized as follows:
AS PREVIOUSLY INCREASE
BALANCE SHEET DATA REPORTED (DECREASE) RESTATED
TOTAL ASSETS $ 90,231 $ -- $ 90,231
Loans payable 995,094 (378,210) 616,884
Total Current Liabilities 8,321,940 (378,210) 7,943,730
TOTAL LIABILITIES 8,635,662 (378,210) 8,257,452
Additional paid in capital 121,815,108 1,199,983 123,015,091
TOTAL STOCKHOLDER'S DEFICIT (8,545,431) 378,210 (8,167,221)
STATEMENT OF OPERATIONS DATA
Interest expense 201,931 (192,941) 8,990
Amortization of convertible notes -- 85,773 85,773
discount
Debt conversion expense 166,857 255,543 422,400
NET LOSS $ (637,459) $ (148,375) $ (785,834)
PRIOR PERIOD ADJUSTMENT
The Company is restating its previously issued 2006 consolidated financial
statements for the following reasons: unrecorded beneficial conversion
feature of convertible debt and related amortization, unrecorded value of
detachable warrants issued with the convertible debt, unrecorded debt
conversion expense as a result of Company's modification of conversion
terms and terms for the exercise of warrants to induce conversion and
warrants exercise. The accompanying financial statement information for
2006 has been restated to reflect the corrections and errors noted above.
The following is a summary of the restatements for the year ended December
31, 2006:
Unrecorded debt conversion expense $(166,857)
Unrecorded inducement expense for the exercise of warrants (178,500)
Unrecorded amortization of beneficial conversion feature of
convertible debt (293,733)
Unrecorded amortization of additional beneficial conversion
feature arising from modification of conversion terms (34,308)
---------
$(673,398)
=========
12
1
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(UNAUDITED - EXPRESSED IN US DOLLARS)
MARCH 31, 2007 AND 2006
2 RESTATEMENT OF FINANCIAL STATEMENTS - CONTINUED
The effect on the Company's previously issued 2006 financial statements is
summarized as follows:
AS
PREVIOUSLY INCREASE
BALANCE SHEET DATA REPORTED (DECREASE) RESTATED
---------- ---------- --------
TOTAL ASSETS $ 15,954 $ -- $ 15,954
Loans payable 811,784 (260,663) 551,121
Total Current Liabilities 8,233,531 (260,663) 7,972,868
TOTAL LIABILITIES 8,552,809 (260,663) 8,292,146
Additional paid in capital 121,198,225 934,061 122,132,286
TOTAL STOCKHOLDER'S DEFICIT (8,536,855) 260,663 (8,276,192)
STATEMENT OF OPERATIONS DATA
Amortization of convertible notes -- 328,041 328,041
discount
Debt conversion expense -- 345,357 345,357
NET LOSS $ (806,161) $ (673,398) $ (1,479,559)
3. 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, 2007, 12,675
of Series X preferred shares convertible into 1,267,500 common
shares are outstanding.
In addition to outstanding shares of common stock, options and
warrants described in these notes; additional shares are issuable in
connection with the change of control transaction in September 2005
in the event the Company issues any securities directly or
indirectly related to pre-merger events.
13
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED - EXPRESSED IN US DOLLARS)
MARCH 31, 2007 AND 2006
3. SHARE CAPITAL - CONTINUED
b) During the three months ended March 31, 2007 the Company issued
12,000,000 shares of common stock for conversion of notes payable.
During the three months ended March 31, 2006, 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
The determination of fair value of share-based payment awards to
employees, directors and non-employees on the date of grant using
the Black-Scholes model is affected by the Company's stock price as
well as assumptions regarding a number of highly complex and
subjective variables. These variables include, but are not limited
to the expected stock price volatility over the term of the awards,
and actual and projected employee stock option exercise behaviors.
Management has used historical data to estimate forfeitures. The
risk-free rate is based on U.S. Treasury rates in effect during the
corresponding period of grant. The expected volatility is based on
the historical volatility of the Company's stock price.
Grant of Stock Options to Non-employees for Services
During 2006, we granted warrants to purchase 77,200,000 shares of
our common stock to various consultants that we deemed essential to
our operations. Of these warrants, 2,169,444 were vested and
reflected as an expense for the three months ended March 31, 2007.
During the three months ended March 31, 2007 the Company recorded
$87,405 (2006 - $0) of compensation expense relating to stock
warrants issued to non-employees for services rendered during the
period. There was no such expense recorded during the three months
ended March 31, 2006.
The estimated fair value of warrants issued to non-employees during
the three months ended March 31, 2007 was of $0.023, $0.055 and
$0.045. Assumptions used to value the warrants: expected dividend
yield Nil%; expected volatility of 155% and 153%; risk-free interest
rate of 4.57%, 4.45% and 4.70% and an expected life of 7 years.
d) Stock Purchase Warrants
At March 31, 2007 the Company had 18,563,888 share purchase warrants
outstanding and exercisable. These warrants were issued in
connection with private placements, non-employee compensation and
other means of financing. The holders of these warrants are entitled
to receive one share of common stock of the Company for one warrant
exercised. The warrants have exercise prices ranging from $0.0117 to
$0.12 per share with a weighted average exercise price of $0.029 per
share and expiration dates between 2007 and 2014. Details of share
purchase warrants for the quarter ended March 31, 2007 are as
follows:
14
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED - EXPRESSED IN US DOLLARS)
MARCH 31, 2007 AND 2006
3. SHARE CAPITAL - CONTINUED
2007
INVESTORS EMPLOYEES & CONSULTANTS TOTAL
-------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
WARRANTS PRICE WARRANTS PRICE WARRANTS PRICE
-------------------------------------------------------------------------
Outstanding at beginning of period 3,400,000 $0.07 6,494,444 $0.01 9,894,444 $0.03
Granted 6,500,000 $0.03 2,169,444 $0.01 8,669,444 $0.02
--------- --------- ----------
Warrants outstanding and
exercisable at end of period 9,900,000 $0.04 8,663,888 $0.01 18,563,888 $0.03
========= ========= ==========
Weighted average fair value of
warrants granted during the period $0.02 $0.02 $0.01
=========================================================================
At March 31, 2007, the following is a summary of share purchase warrants
outstanding and exercisable:
Weighted-
Average Weighted
Remaining Average
Contractual Exercise
Exercise Price Number Life (Years) Price
---------------------------------------------------------------
$0.01 8,247,224 6.55 $0.01
$0.025 - 0.04 8,216,664 6.71 0.03
$0.10 - 0.12 2,100,000 0.01 0.11
--------------------------------------------
18,563,888 5.91 $0.03
---------------------------------------------------------------
4. LOANS PAYABLE
March 31, December 31,
2007 2006
-----------------------
Unsecured, non-interest bearing loan payable, due on
demand from stockholders and other parties $ 148,600 $ 148,600
Note payable, 5% per annum, due June 15, 2007 46,879 15,000
Convertible notes payable, net of unamortized discount
of $293,292 ($158,478 - 2006) and warrant valuation of
$206,598 ($102,185 - 2006) ** 421,405 387,521
-----------------------
Total Loans Payable $ 616,884 $ 551,121
=======================
** During the quarter ended March 31, 2007, the Company issued $325,000
convertible notes. The notes bear interest at 5% and mature within one
year from date of issuance. The Notes are convertible, at the option of
the holder, to shares of the Company's common stock. On February 22, 2007
the Board of Directors changed the per share conversion price from $0.005
to $0.02 for new lenders. Therefore, $50,000 is at a conversion price per
share equal to $0.005 and $275,000 is at $0.02.
15
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED - EXPRESSED IN US DOLLARS)
MARCH 31, 2007 AND 2006
4. LOANS PAYABLE - CONTINUED
In addition, the Company issued, to the holders of convertible notes,
warrants to purchase 6,500,000 shares of the Company's common stock. The
warrants have $0.025 exercise price and expire five-years from date of
issuance. In accordance with generally accepted accounting principles, the
proceeds, received from debt or convertible debt with detachable warrants,
are allocated using the relative fair value of the individual elements at
the time of issuance. Using the Black-Scholes valuations model, the
aggregate value of the 6,500,000 warrants to be $290,049. Assumptions used
to value the warrants: expected volatility of 155%; risk-free interest
rate of 4.46%, 4.57%, and 4.69% and an expected life of 5 years. The
amount allocated to the warrants amounts to $104,413 and has been
recognized as a decrease in loans payable and an increase in additional
paid in capital.
In accordance with generally accepted accounting principles, in the event
the conversion price on notes is less than the Company's stock price on
the date of issuance, the difference is considered to be a beneficial
conversion feature and is amortized as interest expense over the period
from the date of issuance to the earlier of the conversion date or the
stated maturity date. The aggregate beneficial conversion feature of these
convertible notes is $220,587. This was recorded as a decrease in loans
payable and an increase in additional paid in capital. For the quarter
ended March 31, 2007, the Company recognized $14,095 in interest expense
related to the amortization of the beneficial conversion feature recorded
on these convertible notes. As of March 31, 2007, the remaining balance of
the beneficial conversion feature was $206,492.
Prior to 2007, the Company has issued $660,000 convertible notes with
detachable warrants. The notes bear interest at 5% and mature within one
year from date of issuance. The Notes are convertible, at the option of
the holder, to shares of the Company's common stock at a conversion price
per share equal to the lower of (i) 70% of the market price of common
stock at date of issuance; or (ii) $0.025. The warrants are to purchase
the Company's common stock at $0.025 per share expiring in five years. In
September 2006 the board of directors offered to decrease the note
conversion price to $0.005 per share if the note holders exercised their
warrants at $0.01 by September 30, 2006. In consideration for the
reduction, the maturity of the notes was extended for another year. As a
result of the inducement, the Company recognized $422,400 of debt
conversion expense and an increase in additional paid in capital for the
quarter ended March 31, 2007 relating to note holders who converted during
this period.
The detachable warrants issued were five-year warrants to purchase
13,200,000 shares of the Company's common stock at $0.025 per share. In
accordance with generally accepted accounting principles, the proceeds,
received from debt or convertible debt with detachable warrants, are
allocated using the relative fair value of the individual elements at the
time of issuance. Using the Black-Scholes valuations model, the aggregate
value of the 13,200,000 warrants is $164,944. Assumptions used to value
the warrants ranged between: 1.46% and 1.55% for expected volatility;
4.36% and 5.02% for risk-free interest rate and an expected life of 5
years. The amount allocated to the warrants amounts to $102,185 and has
been recognized as a decrease in loans payable and an increase in
additional paid in capital. As of March 31, 2007, 11,900,000 of the
warrants have been exercised.
16
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED - EXPRESSED IN US DOLLARS)
MARCH 31, 2007 AND 2006
4. LOANS PAYABLE - CONTINUED
In accordance with generally accepted accounting principles, in the event
the conversion price on notes is less than the Company's stock price on
the date of issuance, the difference is considered to be a beneficial
conversion feature and is amortized as interest expense over the period
from the date of issuance to the earlier of the conversion date or the
stated maturity date. The aggregate beneficial conversion feature of these
convertible notes to be $358,477. In relation to the inducement to
convert, an additional beneficial conversion feature of $128,042 has been
recognized. These were recorded as decreases in loans payable and
increases in additional paid in capital. For the quarter ended March 31,
2007, the Company recognized $71,677 in interest expense related to the
amortization of the beneficial conversion feature recorded on these
convertible notes. As of March 31, 2007, the remaining balance of the
beneficial conversion feature was $86,800. Prior period adjustments were
recorded to properly recognize convertible debt transactions in 2006 (see
note 2).
5. COMMITMENTS AND CONTINGENCIES
The Company is party to various legal claims and lawsuits that have arisen
in the normal course of business. There have been no material changes in
the status of these matters since the issuance of the most recent audited
annual financial statements.
LITIGATION
a) TST, Inc.
In March 2000, TST, Inc. ("TST"), a vendor to a subsidiary of
Pacific Baja (Note 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.
17
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED - EXPRESSED IN US DOLLARS)
MARCH 31, 2007 AND 2006
5. COMMITMENTS AND CONTINGENCIES - LITIGATION CONTINUED
a) TST, Inc.- Continued
At March 31, 2007, the Company has included $3,353,111 (December 31,
2006 - $3,273,352) in regard to this matter in provision for lawsuit
settlements. It was determined that TST received payment in
preference to other creditors before Pacific Baja filed its Chapter
11 petition in bankruptcy. TST and Pacific Baja settled the
preference payment issue with TST paying $20,000 to Pacific Baja and
TST relinquishing the right to receive $63,000 therefore; $83,000
has been 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 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.
18
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED - EXPRESSED IN US DOLLARS)
MARCH 31, 2007 AND 2006
5. COMMITMENTS AND CONTINGENCIES - CONTINUED
c) Former Officer - Continued
During 2004 the Company issued the 4,000,000 shares. Mr. Hofbauer
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 were
returned to the Company in October 2006.
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,
2007, 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.
19
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.
20
RESTATEMENT OF FINANCIAL STATEMENTS
The Company concluded that our consolidated financial statements for September
30, 2006, December 31, 2006 and March 31, 2007 needed to be restated since the
liabilities were overstated liabilities, expenses and net loss were understated
and additional paid in capital was understated.
We are restating our previously issued consolidated financial statements for the
following reasons: unrecorded beneficial conversion feature of convertible debt
and related amortization, unrecorded value of detachable warrants issued with
the convertible debt, unrecorded debt conversion expense as a result of
Company's modification of conversion terms and terms for the exercise of
warrants to induce conversion and warrants exercise.
The following table sets forth the impact of these restatements on certain
amounts previously reported in our consolidated financial statements for the
quarter ended March 31, 2007:
AS
PREVIOUSLY INCREASE
REPORTED (DECREASE) RESTATED
-------- ---------- --------
BALANCE SHEET DATA
Loans payable $ 995,094 $(378,210) $ 616,884
Additional paid in capital 121,815,108 1,199,983 123,015,091
STATEMENT OF OPERATIONS DATA
Interest expense 201,931 (192,941) 8,990
Amortization of convertible notes discount -- 85,773 85,773
Debt conversion expense 166,857 255,543 422,400
Net loss $ (637,459) $ (148,375) $ (785,834)
PRIOR PERIOD ADJUSTMENT
The Company is restating its previously issued 2006 consolidated financial
statements for the following reasons: unrecorded beneficial conversion feature
of convertible debt and related amortization, unrecorded value of detachable
warrants issued with the convertible debt, unrecorded debt conversion expense as
a result of Company's modification of conversion terms and terms for the
exercise of warrants to induce conversion and warrants exercise. The effect on
the Company's previously issued 2006 financial statements is summarized as
follows:
AS
PREVIOUSLY INCREASE
REPORTED (DECREASE) RESTATED
-------- ---------- --------
BALANCE SHEET DATA
Loans payable $ 811,784 $(260,663) $ 551,121
Additional paid in capital 121,198,225 934,061 122,132,286
STATEMENT OF OPERATIONS DATA
Amortization of convertible notes discount -- 328,041 328,041
Debt conversion expense -- 345,357 334,357
Net Loss $ (806,161) $(673,398) $(1,479,559)
21
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. Traditional engineered solutions for this problem use
belts or exhaust gas (superchargers or turbochargers) to supply additional air
to an engine. Turbodyne, instead, uses electric motors to supply additional air.
Because an electric motor can be engaged more quickly, compared to the
mechanical delays inherent in a belt or exhaust gas device, Turbodyne's products
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.
Since September 2005 when it took office management has obtained some additional
financing and has conducted 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) and related product line
o Filing for protection of new intellectual properties related to our
products
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.
In February 2007 the Company filed a provisional application in the United
States Patent and Trademark Office for a TurboPac related technology. Referred
to as the 'TurboFlow', the patent disclosure includes application of the
technology to vehicle types commonly referred to as 'hybrids' or 'low emission
vehicles'. The disclosed technology applies advanced controls, energy
management, and a TurboPac related technology to avoid problems encountered when
using traditional turbo- or super- charging air injection units with a small
engine in those types of vehicles.
22
RESULTS OF OPERATIONS
First Quarter Ended March 31
----------------------------------------
Percentage
2007 2006 Increase
(Decrease)
------------ ------------ ----------
Total Revenue $5,556 $5,556 Nil
Operating Expenses ($396,277) ($294,635) 34%
Net Loss from Operations ($390,721) ($289,079) 35%
Other Income (expense), net ($395,113) ($4,297) (9,095%)
============ ============ ==========
Net Loss ($785,834) ($293,376) (168%)
============ ============ ==========
NET REVENUE
First Quarter Ended March 31
----------------------------------------
Percentage
2007 2006 Increase
------------ ------------ ----------
License Fee $5,556 $5,556 Nil
============ ============ ==========
We had no revenue in 2006 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,
2007 and 2006, $5,556 of licensing fees was recognized as income. Our continued
net losses from operations reflect our continued operating expenses and our
inability to generate revenues. We believe that we will not be able to generate
any significant revenues from TurboPac(TM) until we complete our production
models and enter into manufacturing and sales arrangements.
COSTS OF SALES
We had no sales in 2007 and 2006; therefore we did not have any costs of sales
during any portion of these years.
OPERATING EXPENSES
Operating expense increased in first quarter 2007 substantially from the
comparable quarter in 2006. This was primarily due to resumption of more
operations and research and development operations which included the filing of
a provisional application with the United States Patent and Trademark Office for
a TurboPac related technology.
23
The primary components of our operating expenses are outlined in the table
below:
First Quarter Ended March 31
----------------------------------------
Percentage
2007 2006 Increase
(Decrease)
------------ ------------ ----------
Selling, General and Administrative Expenses $235,040 $185,557 27%
Research and Development Expenses $80,941 $22,715 256%
Litigation Expenses $79,759 $85,872 (7%)
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative costs included management compensation and
overhead and increased due to consulting fees to management.
RESEARCH AND DEVELOPMENT
The increase in research and development costs in 2007 is due to the resumption
of limited development 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 2007 are associated with the
development of our Turbopac-related technology "TurboFlow".
LITIGATION EXPENSE
The decrease in litigation expense is primarily attributable to our settlement
of litigations and reduction of fees necessary to defend these actions.
STOCK BASED COMPENSATION
Stock based compensation included in expenses was $87,405 for the three months
ended March 31, 2007. We did not have any stock based compensation during the
three month period ended March 31, 2006.
During 2006, we granted warrants to purchase 77,200,000 shares of our common
stock to various consultants that we deemed essential to our operations. Of
these warrants, 2,169,444 were vested and reflected as an expense for the three
months ended March 31, 2007. As of December 31, 2006 6,494,444 were vested
therefore the total vested as of March 31, 2007 was 8,663,888.
The method by which we account for stock based compensation is discussed below
under "Critical Accounting Policies".
24
OTHER INCOME (EXPENSE)
First Quarter Ended March 31
----------------------------------------
Percentage
2007 2006 Increase
(Decrease)
------------ ------------ ----------
Gain on Extinguishment of debt $122,050 -- 100%
Interest Expense ($8,990) ($4,297) 109%
Amortization of Discount on Convertible Notes ($85,773) -- 100%
Debt Conversion Expense ($422,400) -- 100%
The Company continues to negotiate with our creditors and trade debt holders on
settlement of accounts payable from periods prior to the current management
assuming operation of the Company. When achieved this is represented as a gain
on extinguishment of accounts payable.
The Company had additional other expenses for the quarter ended March 31, 2007
for amortization of discount on convertible notes and for related debt
conversion expenses.
FINANCIAL CONDITION
CASH AND WORKING CAPITAL
----------------------------------------------------------------
Percentage
At March 31, 2007 At December 31, 2006 Increase / (Decrease)
----------------------------------------------------------------
Current Assets $90,231 $15,417 485%
Current Liabilities ($7,943,730) ($7,972,868) 0%
Working Capital Deficit ($7,853,499) ($7,957,451) (1%)
The decrease to our working capital deficit was attributable to an increase in
cash and a decrease in current liabilities due to a settlement of debt and
payments of debt.
LIABILITIES
--------------------------------------------------------------
Percentage
At March 31, 2007 At December 31, 2006 Increase / (Decrease)
--------------------------------------------------------------
Provision for Lawsuit
Settlements $4,754,896 $4,675,137 2%
Accounts Payable $2,152,157 $2,302,417 (7%)
Accrued Liabilities $419,793 $444,193 (5%)
Short-Term Loans $616,884 $551,121 12%
The increase in provision for lawsuits is due to accrued interest on outstanding
judgments. Accounts payable decreased due to a settlement of debt and payments
of debt. Short-term loans increased in connection with our note financing to
generate cash. Short-term loans are net of discounts of $293,292 (2006 -
$158,478) and warrant allocation of $206,598 (2006 - $102,185).
During the quarter ended March 31, 2007, the Company issued $325,000 convertible
notes. The notes bear interest at 5% and mature within one year from date of
issuance. The Notes are convertible, at the option of the holder, to shares of
the Company's common stock. On February 22, 2007 the Board of Directors changed
the per share conversion price from $0.005 to $0.02 for new lenders. Therefore,
$50,000 is at a conversion price per share equal to $0.005 and $275,000 is at
$0.02.
In addition, the Company issued to the holders of convertible notes warrants to
purchase 6,500,000 shares of the Company's common stock. In accordance with
generally accepted accounting principles, the Company allocates the proceeds
received from debt or convertible debt with detachable warrants using the
relative fair value of the individual elements at the time of issuance.
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, 2007 are unsecured, non-interest
bearing advances of $148,600 that we anticipate will be converted into shares of
our common stock.
26
CASH FLOWS
---------------------------
Three Months Ended March 31
---------------------------
2007 2006
---- ----
Net Cash used in Operating Activities ($281,186) ($208,985)
Net Cash provided by Financing Activities $356,000 $160,000
--------- ---------
Net Increase (decrease) in Cash During Period $74,814 ($48,985)
========= =========
The increase in cash used in operating activities was due to the fact that
additional funds were obtained in private financing in 2006 and 2007. This
enabled us to utilize more funds for development in 2007 than in 2006.
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
2006 and 2007 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.
THERE IS SUBSTANTIAL DOUBT AS TO OUR ABILITY TO CONTINUE AS A GOING CONCERN
Our unaudited 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 $129,619,466 at March 31, 2007, 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.
27
STOCK BASED COMPENSATION
The Company accounts for stock-based compensation under the fair value method in
accordance with Statement of Financial Accounting Standards No. 123 (revised
2004), "Share Based Payment" "SFAS 123(R)".
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. Previously, research prototypes were sold and proceeds reflected by
reductions in our research and development costs. As new technology
pre-production manufacturing unites are produced and related non-recurring
engineer services are delivered we will recognize the sales proceeds as revenue.
RESEARCH AND DEVELOPMENT
Research and development costs related to present and future products are
charged to operations in the year incurred. Previously, research prototypes were
sold and proceeds reflected by reductions in our research and development costs.
As new technology pre-production manufacturing units are produced and related
non-recurring engineer services are delivered we will recognize the sales
proceeds as revenue.
28
NEW ACCOUNTING PRONOUNCEMENTS
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities" ("SFAS 159") which permits entities
to choose to measure many financial instruments and certain other items at fair
value that are not currently required to be measured at fair value. SFAS 159
will be effective for the Company on January 1, 2008. The Company is currently
evaluating the impact SFAS 159 may have on its financial condition or results of
operations.
In September 2006, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Issues No. 157, "Fair Value Measurements"
("SFAS 157"), which defines the fair value, establishes a framework for
measuring fair value and expands disclosures about fair value measurements. This
statement is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal
years. Early adoption is encouraged, provided that the Company has not yet
issued financial statements for that fiscal year, including any financial
statements for an interim period within that fiscal year. The Company is
currently evaluating the impact SFAS 157 may have on its financial condition or
results of operations.
In June 2006, the FASB released FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 (FIN
48). FIN 48 clarifies the accounting and reporting for uncertainties in income
tax law. This interpretation prescribes a comprehensive model for the financial
statement recognition, measurement, presentation and disclosure of uncertain tax
positions taken or expected to be taken in income tax returns. This statement is
effective for fiscal years beginning after December 15, 2006. The Company is
currently evaluating the impact FIN 48 may have on its financial condition or
results of operations.
29
ITEM 3A. CONTROLS AND PROCEDURES.
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
As required by Rule 13a-15 under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), the Company's Chief Executive Officer and its Chief
Financial Officer reviewed and evaluated the effectiveness of the Company's
disclosure controls and procedures (as defined in Exchange Act Rule
13a-15(e)).These controls are designed to ensure that material information the
Company must disclose in its reports filed or submitted under the Exchange Act
is recorded, processed, summarized and reported on a timely basis. These
officers have concluded, based on that evaluation, that as of such date, the
Company's disclosure controls and procedures were effective at a reasonable
assurance level for a Company with substantially no activities and no personnel.
The Company believes it must devise new procedures as it increases its activity
and its personnel.
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.
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PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES.
The following issuances of securities occurred during the three months ended
March 31, 2007.
During the three months ended March 31, 2007 we sold 1 unit of our securities in
a private placement. Each unit consisted of $100,000, a 5% convertible note and
warrants to purchase 2,000,000 of our shares at $0.025. The note is convertible
at any time prior to payment. The conversion price was one-half penny ($.005).
The securities were issued pursuant to Section 4(2) of the Securities Act of
1933 and are exempt from the registration requirements under that act. In
addition during such quarter $60,000 of principal of the aforesaid notes were
converted into 12,000,000 shares of our common stock. These latter shares were
issued pursuant to Section 3a(9) of the Securities Act of 1933 and are exempt
from the registration requirements under that act.
During the three months ended March 31, 2007 we sold 2.25 units of our
securities in a private placement. Each unit consisted of $100,000, a 5%
convertible note and warrants to purchase 2,000,000 of our shares at $0.02. The
note is convertible at any time prior to payment. The conversion price was two
cents ($.02). The securities 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.
31
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has caused this amendment number 1 to this quarterly report to be
signed on its behalf by the undersigned, thereunto duly authorized.
TURBODYNE TECHNOLOGIES, INC.
Dated: June 4, 2007 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
32