UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended JUNE 30, 2007
[ ] 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
- -------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
36 E. BARNETT STREET, 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
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(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: 365,459,444 shares of common stock
issued and outstanding as of AUGUST 6, 2007.
Transitional Small Business Disclosure Format (check one): Yes [ ] NO [X]
TURBODYNE TECHNOLOGIES, INC.
INDEX TO FORM 10-QSB
JUNE 30, 2007
PAGE NUMBER
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements: 3
Consolidated Balance Sheets as of June 30, 2007
and December 31, 2006 4
Consolidated Statements of Operations for the three-month
and six-month periods ended
June 30, 2007 and June 30, 2006 5
Consolidated Statements of Cash Flows for the six-month
periods ended June 30, 2007 and June 30, 2006 6
Notes to the Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis or Plan of Operations 19
Item 3. Controls and Procedures 28
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 29
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 29
Item 6. Exhibits 30
SIGNATURES 31
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PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX-MONTH PERIODS ENDED
JUNE 30, 2007 AND 2006
(UNAUDITED - EXPRESSED IN US DOLLARS)
-3-
=================================================================================================
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(EXPRESSED IN US DOLLARS)
JUNE 30 December 31
2007 2006
- -------------------------------------------------------------------------------------------------
ASSETS (UNAUDITED)
CURRENT
Cash $ 8,765 $ 14,745
Prepaid expenses and other current assets 672 672
------------------------------
TOTAL CURRENT ASSETS 9,437 15,417
PROPERTY AND EQUIPMENT, net -- 537
------------------------------
TOTAL ASSETS $ 9,437 $ 15,954
=================================================================================================
LIABILITIES AND CAPITAL DEFICIT
LIABILITIES
CURRENT
Accounts payable $ 2,161,295 $ 2,302,417
Accrued liabilities 402,243 444,193
Provision for lawsuit settlements (Note 4) 4,834,655 4,675,137
Loans payable 690,548 551,121
------------------------------
TOTAL CURRENT LIABILITIES 8,088,741 7,972,868
DEFERRED LICENSING FEE 308,166 319,278
------------------------------
TOTAL LIABILITIES 8,396,907 8,292,146
------------------------------
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 2007 (2006 - 45,175) 12 12
365,316,577 common shares in 2007 (2006 - 345,316,577) 365,317 345,317
Treasury stock, at cost (1,778,580 shares) (1,963,612) (1,963,612)
Additional paid-in capital 123,258,888 122,132,286
Other comprehensive income -
Foreign exchange translation gain 35,119 35,119
Accumulated deficit (130,083,194) (128,825,314)
------------------------------
TOTAL CAPITAL DEFICIT (8,387,470) (8,276,192)
------------------------------
TOTAL LIABILITIES AND CAPITAL DEFICIT $ 9,437 $ 15,954
=================================================================================================
The accompanying notes are an integral part of these unaudited consolidated financial statements.
-4-
==============================================================================================================
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited - Expressed in US Dollars)
THREE-MONTH SIX-MONTH
PERIODS ENDED PERIODS ENDED
JUNE 30 JUNE 30
2007 2006 2007 2006
- --------------------------------------------------------------------------------------------------------------
REVENUE
Licensing fees $ 5,556 $ 5,556 $ 11,112 $ 11,112
----------------------------------------------------------------
TOTAL REVENUE 5,556 5,556 11,112 11,112
----------------------------------------------------------------
EXPENSES (RECOVERY)
General and administrative 249,159 175,361 484,199 360,919
Research and development 144,735 47,394 225,676 70,109
Litigation expense 79,765 67,109 159,524 152,980
Depreciation and amortization -- 363 537 854
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TOTAL EXPENSES
473,659 290,227 869,936 584,862
----------------------------------------------------------------
LOSS FROM OPERATIONS (468,103) (284,671) (858,824) (573,750)
OTHER INCOME (EXPENSES)
Interest expense (12,323) (6,406) (21,313) (10,703)
Amortization of discount on
convertible notes (101,341) -- (187,114) --
Debt conversion expense -- -- (422,400) --
Gain on extinguishment of debt 109,721 -- 231,771 --
----------------------------------------------------------------
LOSS FOR THE PERIOD $ (472,046) $ (291,077) $ (1,257,880) $ (584,453)
================================================================
Loss per common share
BASIC AND DILUTED $ (0.00) $ (0.00) $ (0.00) $ (0.00)
==============================================================================================================
WEIGHTED AVERAGE SHARES - BASIC AND DILUTED 360,833,061 320,416,577 355,084,533 320,416,577
==============================================================================================================
The accompanying notes are an integral part of these unaudited consolidated financial statements.
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==============================================================================================
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED - EXPRESSED IN US DOLLARS)
FOR THE SIX-MONTH PERIODS ENDED JUNE 30 2007 2006
- ----------------------------------------------------------------------------------------------
CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES
Net loss for the period $(1,257,880) $ (584,453)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Amortization of deferred licensing fees (11,112) (11,112)
Depreciation and amortization 537 854
Gain on extinguishment of debt (231,771) --
Debt conversion expense 422,400 --
Amortization of discount on convertible debt 187,114 --
Warrant compensation (Note 2) 199,203 23,646
(Increase) decrease in operating assets
Prepaid expenses and other current assets -- (1,800)
Increase (decrease) in operating liabilities
Accounts payable 90,649 89,407
Accrued liabilities and provision for lawsuit settlements 138,880 149,236
--------------------------
Net cash used in operating activities (461,980) (334,222)
--------------------------
FINANCING ACTIVITIES
Convertible Notes Payable 425,000 220,000
Notes Payable 31,000 15,000
--------------------------
Net cash provided by financing activities 456,000 235,000
--------------------------
NET INCREASE (DECREASE) IN CASH (5,980) (99,222)
CASH, beginning of period 14,745 100,538
--------------------------
CASH, end of period $ 8,765 $ 1,316
==============================================================================================
SUPPLEMENTARY DISCLOSURE OF CASH FLOW INFORMATION
Beneficial conversion feature of convertible debt $ 285,882 $ --
Value of warrants issued with convertible debt 241,303 --
Conversion of note to common stock 100,000 --
==============================================================================================
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)
JUNE 30, 2007 AND 2006
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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") is a product development and engineering company engaged in the
design, engineering, development and distribution of patented, proprietary,
electrically powered air charging systems that improve the performance of gas
or diesel internal combustion vehicles, and are used in air charging
applications.
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/A 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.
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TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED - EXPRESSED IN US DOLLARS)
JUNE 30, 2007 AND 2006
- --------------------------------------------------------------------------------
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
CONTINUED
GOING CONCERN
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. The Company has
suffered net operating losses in recent periods, has an accumulated deficit
of $130,083,194 at June 30, 2007 and a total capital deficit of $8,387,470 at
June 30, 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.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements, stated in United States
dollars, include the accounts of Turbodyne Technologies, Inc. and its wholly
owned subsidiaries, Turbodyne Systems, Inc., Turbodyne Germany Ltd.,
Electronic Boosting Systems Inc. and Pacific Baja Light Metals Corp.
("Pacific Baja"). All intercompany accounts and transactions have been
eliminated on consolidation.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization of property and equipment is computed using the
straight-line method over estimated useful lives as follows:
Computers and measurement equipment - 3 years
Machinery and equipment - 7 to 15 years
Furniture and fixtures - 5 to 10 years
LICENSES
Licenses are recorded at cost and are amortized over their 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.
-8-
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TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED - EXPRESSED IN US DOLLARS)
JUNE 30, 2007 AND 2006
- --------------------------------------------------------------------------------
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
RECOGNITION OF REVENUE
License fee revenue is recognized over the term of the license agreement.
During the year ended December 31, 2003, $400,000 in license fees were
deferred and are being amortized over 18 years. As a result, for the three
and six months ended June 30, $5,556 and $11,112, respectively, for both 2007
and 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.
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)".
-9-
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TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED - EXPRESSED IN US DOLLARS)
JUNE 30, 2007 AND 2006
- --------------------------------------------------------------------------------
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
CONTINUED
RESEARCH AND DEVELOPMENT
Research and development costs related to present and future products are
charged to operations in the period incurred. Previously, research prototypes
were sold and proceeds reflected by reductions in our research and
development costs. As new technology pre-production manufacturing units are
produced and related non-recurring engineer services are delivered we will
recognize the sales proceeds as revenue.
INCOME TAXES -
The Company accounts for income taxes under the asset and liability method of
accounting for income taxes, which recognizes deferred tax assets and
liabilities for the estimated future tax consequences attributable to
differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates in effect for the years
in which those temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
LEGAL FEES
The Company expenses legal fees in connection with litigation as incurred.
COMPREHENSIVE INCOME
The Company has adopted SFAS No. 130, "Reporting Comprehensive Income". SFAS
No. 130 establishes standards to measure all changes in equity that result
from transactions and other economic events other than transactions with
owners. Comprehensive income is the total of net earnings (loss) and all
other non-owner changes in equity. Except for net earnings (loss) and foreign
currency translation adjustments, the Company does not have any transactions
and other economic events that qualify as comprehensive income as defined
under SFAS No. 130. As foreign currency translation adjustments were
immaterial to the Company's consolidated financial statements, net earnings
(loss) approximated comprehensive income for the quarter ended June 30, 2007
and 2006.
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TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED - EXPRESSED IN US DOLLARS)
JUNE 30, 2007 AND 2006
- --------------------------------------------------------------------------------
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
CONTINUED
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.
- --------------------------------------------------------------------------------
2. SHARE CAPITAL
Transactions not disclosed elsewhere in these consolidated interim financial
statements are as follows:
a) Authorized Capital/Outstanding Shares
The Company has 1,000,000,000 common shares authorized.
In 2003, 150,000 of the 1 million preferred shares were designated as
Series X preferred shares. These shares have a par value of $0.001 per
share with each share being convertible into 100 common shares at the
discretion of the holder. As of June 30, 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.
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TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED - EXPRESSED IN US DOLLARS)
JUNE 30, 2007 AND 2006
- --------------------------------------------------------------------------------
2. SHARE CAPITAL - CONTINUED
b) During the six months ended June 30, 2007 the Company issued 20,000,000
shares of common stock for conversion of notes payable. During the six
months ended June 30, 2006 there were no share issuances.
c) Stock Options and Warrants
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. 2007
NON-EMPLOYEES EMPLOYEES TOTAL
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
Outstanding at
beginning of 2,505,000 $ 0.08 16,033,300 $ 0.06 18,538,300 $ 0.06
period
Expired (380,000) 0.07 (136,300) 0.04 (516,300) 0.06
--------------------------------------------------------------------------
Outstanding at
end of
Period 2,125,000 0.06 15,897,000 0.06 18,022,000 0.06
--------------------------------------------------------------------------
Options
exercisable at
end of period 2,125,000 $ 0.06 15,897,000 $ 0.06 18,022,000 $ 0.06
==========================================================================
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, 4,338,888 were vested and reflected as an expense for the six
months ended June 30, 2007.
During the six months ended June 30, 2007 the Company recorded $199,203 (2006
- $23,646) of compensation expense relating to stock warrants issued to
non-employees for services rendered during the period. The non cash warrant
expense is allocated with $161,054 to general and administrative expenses and
$38,149 to research and development.
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TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED - EXPRESSED IN US DOLLARS)
JUNE 30, 2007 AND 2006
- --------------------------------------------------------------------------------
2. SHARE CAPITAL - CONTINUED
The estimated fair value of warrants issued to non-employees during the six
months ended June 30, 2007 was of $0.023, $0.054, $0.044, $0.049, $0.06 and
$0.047. Assumptions used to value the warrants: expected dividend yield Nil%;
expected volatility of 155%, 153%, 152% and 150%; risk-free interest rate of
4.57%, 4.45%, 4.70%, 4.55% and 4.96%and an expected life of 7 years.
At June 30, 2007 the Company had 21,633,332 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 period ended June 30, 2007
are as follows:
2007
INVESTORS EMPLOYEES & CONSULTANTS TOTAL
------------------------------------------------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
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 8,500,000 $ 0.025 4,338,888 $ 0.01 12,838,888 $ 0.02
Expired (1,100,000) $ 0.12 -- $ -- (1,100,000) $ 0.12
----------- ---------- -----------
Warrants outstanding and
exercisable at end of
period 10,800,000 $ 0.03 10,833,332 $ 0.01 21,633,332 $ 0.02
=========== =========== ============
Weighted average fair
value of
warrants granted during
the period $ 0.02 $ 0.02 $ 0.01
========================================================================
At June 30, 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 10,277,780 6.42 $ 0.01
$0.025 - 0.04 10,355,552 4.78 0.026
$0.10 - 0.12 1,000,000 .30 0.10
---------- -------- ---------
21,633,332 5.35 $ 0.02
===========
-13-
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TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED - EXPRESSED IN US DOLLARS)
JUNE 30, 2007 AND 2006
- --------------------------------------------------------------------------------
3. LOANS PAYABLE
June 30, 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 47,454 15,000
Convertible notes payable, net of unamortized
discount of $257,246 ($158,478 - 2006) and
warrant valuation of $241,303 ($102,185 - 2006) ** 494,494 387,521
-------- --------
Total Loans Payable $690,548 $551,121
** During the six-month period ended June 30, 2007, the Company issued
$425,000 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 $375,000 is at $0.02.
In addition, the Company issued, to the holders of convertible notes,
warrants to purchase 8,500,000 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 8,500,000 warrants to be $444,188. Assumptions used to value the
warrants: expected volatility ranging from 113% to 155%; risk-free interest
rate of 4.46%, 4.57%, 4.69% and 4.92% and an expected life of 5 years. The
amount allocated to the warrants amounts to $139,118 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
$285,882. This was recorded as a decrease in loans payable and an increase in
additional paid in capital. For the six months ended June 30, 2007, the
Company recognized $74,278 in interest expense related to the amortization of
the beneficial conversion feature recorded on these convertible notes. As of
June 30, 2007, the remaining balance of the beneficial conversion feature was
$211,603.
-14-
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TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED - EXPRESSED IN US DOLLARS)
JUNE 30, 2007 AND 2006
- --------------------------------------------------------------------------------
3. LOANS PAYABLE - CONTINUED
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 June 30, 2007,
11,900,000 of the warrants have been exercised.
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 six months ended June 30, 2007, the Company recognized $112,836 in
interest expense related to the amortization of the beneficial conversion
feature recorded on these convertible notes. As of June 30, 2007, the
remaining balance of the beneficial conversion feature was $45,643. Prior
period adjustments were recorded to properly recognize convertible debt
transactions in 2006.
The total amount of interest expense related to the amortization of the
beneficial conversion feature recorded on all convertible notes was $187,114
during the six months ended June 30 2007. As of June 30, 2007, the remaining
balance of the beneficial conversion feature of all notes was $257,246.
-15-
- --------------------------------------------------------------------------------
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED - EXPRESSED IN US DOLLARS)
JUNE 30, 2007 AND 2006
- --------------------------------------------------------------------------------
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 June 30, 2007, the Company has included $3,432,870 (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.
-16-
- --------------------------------------------------------------------------------
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED - EXPRESSED IN US DOLLARS)
JUNE 30, 2007 AND 2006
- --------------------------------------------------------------------------------
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
Pacific3 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 were raised to
settle amounts owed, like amounts were released from the Certificate
of Deposit. If the funds raised were not adequate to settle amounts
owed, the Company would 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
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 and are included in treasury
shares.
-17-
- --------------------------------------------------------------------------------
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED - EXPRESSED IN US DOLLARS)
JUNE 30, 2007 AND 2006
- --------------------------------------------------------------------------------
4. COMMITMENTS AND CONTINGENCIES - CONTINUED
d) Former Director
A former director of Turbodyne, Erwin Kramer (the "Plaintiff"),
represented by his attorney Claus Schmidt, a former attorney of
Turbodyne at the time of the alleged claim, filed a legal action in
Germany against Turbodyne, our non-operating subsidiary Turbodyne
Europe GmbH ("Turbodyne GmbH"), and ex-employees of Turbodyne GmbH,
Peter Kitzinski and Marcus Kumbrick (collectively the "Defendants"),
with the Regional Frankfurt court (the "German Court") in September,
2004. The Plaintiff claims damages of Euro 245,620 plus 5% interest
per annum against the Defendants in respect of actions taken by the
Defendants while employed with Turbodyne GmbH.
On September 9, 2004, the German Court, on a motion by the Defendants
to the suit, dismissed the Plaintiff's claims against Peter Kitzinski
and Marcus Kumbrick, and ordered that Turbodyne's patents in Munich
be attached pending the resolution of the Plaintiff's claim against
Turbodyne and Turbodyne GmbH. On June 13, 2005 the Court in Frankfurt
dismissed the claim. The Plaintiff filed an appeal against this
judgment with the Higher Regional Court in Frankfurt.
The Plaintiff's attorney, Claus Schmidt, also filed similar suits on
behalf of Frank Walter and Herbert Taeuber. The German courts are
indicating that all three suits need to be filed in the United States
not Germany. Presently the suits have not been filed in the United
States. We vigorously dispute this claim and have retained German
counsel to defend it and seek its dismissal. At June 30, 2007, the
Company has included $405,785 in regard to this matter in the
provision for lawsuit settlements.
e) Other
The Company is currently involved in various collection claims and
other legal actions. It is not possible at this time to predict the
outcome of the legal actions.
-18-
5. SUBSEQUENT EVENTS
Subsequent to June 30, 2007 the Company was advised that documents for an action
entitled CRESCENT FUND, LLC V TURBODYNE TECHNOLOGIES, INC. have been filed in
Supreme Court of the State of New York for the County of New York. Service has
not been affected. The action, we understand, seeks $300,000 damages based upon
claims for alleged breaches of contract and covenants of good faith and fair
dealing. Plaintiff received a certificate for 5,000,000 shares of our common
stock to perform investor relations services for us under a contract. The
damages, it is claimed, arose because we failed to give plaintiff an opinion to
seel the shares. It is the Company's position that plaintiff failed to perform
any of the duties and obligations required of it under the aforesaid contract
which was fraudulently induced. Therefore plaintiff is not entitled to retain
the shares. The Company will assert a counterclaim for the return of such shares
and damages based upon plaintiff's breach and fraud.
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.
-19-
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, and are
used in other air-charging applications. 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. The ability to have `air on demand' also leads to other
applications for non-motive needs.
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 or to continue these activities.
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.
-20-
RESULTS OF OPERATIONS
-------------------------------------------- -------------------------------------------
Three Months Ended June 30 Six Months Ended June 30
-------------------------------------------- -------------------------------------------
Percentage Percentage
2007 2006 Increase 2007 2006 Increase
(Decrease) (Decrease)
------------ ------------ ------------- ------------ ------------ ------------
Total Revenue $ 5,556 $ 5,556 Nil $ 11,112 $ 11,112 Nil
Operating Expenses
($ 473,659) ($ 290,227) 63% ($ 869,936) ($ 584,862) 49%
Net Loss from
Operations ($ 468,103) ($ 284,671) 64% ($ 858,824) ($ 573,750) 50%
Other Income
(Expenses) ($ 3,943) ($ 6,406) 38% ($ 399,056) ($ 10,703) (3,628%)
=========== =========== =========== =========== =========== ===========
Net (Loss) ($ 472,046) ($ 291,077) (62%) ($1,257,880) ($ 584,453) (115%)
=========== =========== =========== =========== =========== ===========
NET REVENUE
-------------------------------------------- -------------------------------------------
Three Months Ended June 30 Six Months Ended June 30
-------------------------------------------- -------------------------------------------
2007 2006 Percentage 2007 2006 Percentage
Increase Increase
------------ ------------ ------------- ------------ ------------ ------------
License Fee $ 5,556 $ 5,556 Nil $ 11,112 $ 11,112 Nil
We had no revenue in 2007 and 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 and six months
ended June 30, 2007 and 2006, $5,556 and $11,112 of licensing fees was
recognized as income, respectively. 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.
-21-
OPERATING EXPENSES
Operating expenses increased in both the three and six months ended June 30,
2007 from the comparable periods in 2006.
The primary components of our operating expenses are outlined in the table
below:
-------------------------------------------- -------------------------------------------
Three Months Ended June 30 Six Months Ended June 30
-------------------------------------------- -------------------------------------------
Percentage Percentage
2007 2006 Increase 2007 2006 Increase
(Decrease) (Decrease)
------------ ------------ ------------- ------------ ------------ ------------
General and
Administrative
Expenses
$249,159 $175,361 42% $484,199 $360,919 34%
Research and
Development
Expenses $144,735 $ 47,394 205% $225,676 $70,109 222%
Litigation Expenses $79,765 $ 67,109 19% $159,524 $152,980 4%
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative costs included management compensation and overhead
and increased due an increase in the number of consultants and the amount of
consulting fees. For the three and six month periods ended June 30, 2007
compensation includes the non cash warrant expense amount of $73,648 (2006 -
$23,646) and $161,054, respectively. (Financial Statement Note 2(c))
RESEARCH AND DEVELOPMENT
The increase in research and development costs in 2007 is due to the resumption
of limited development operations. For the three and six month periods ended
June 30, 2007 compensation includes the non cash warrant expense amount of
$38,149 (2006 - $0). (Financial Statement Note 2(c)) 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 increase in litigation expense is due to accrued interest on outstanding
judgments.
-22-
STOCK BASED COMPENSATION
Stock based compensation included in expenses was $199,203 (2006 - $23,646) for
the six months ended June 30, 2007. The non cash warrant expense allocation
follows cash compensation with $161,054 (2006 - $23,646) to general and
administrative expenses and $38,149 to research and development.
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, 4,338,888 were vested and reflected as an expense for the six
months ended June 30, 2007. As of December 31, 2006 6,494,444 were vested
therefore the total vested as of June 30, 2007 was 10,833,332
The method by which we account for stock based compensation is discussed below
under "Critical Accounting Policies".
OTHER INCOME (EXPENSE)
----------------------------------------- ---------------------------------------
Second Quarter Ended June 30 Six Months Ended June 30
----------------------------------------- ---------------------------------------
Percentage Percentage
Increase Increase
2007 2006 (Decrease) 2007 2006 (Decrease)
---------- ----------- -------------- ------------ ----------- -----------
Gain on Extinguishment
of debt $ 109,721 -- 100% $ 231,770 -- 100%
Interest Expense ($ 12,323) ($ 6,406) 92% ($ 21,313) ($ 10,703) 99%
Amortization of Discount
on Convertible Notes ($101,341) -- 100% ($187,114) -- 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 three and six month periods
ended June 30, 2007 for amortization of discount on convertible notes and for
related debt conversion expenses (Financial Statement Note 3).
-23-
FINANCIAL CONDITION
CASH AND WORKING CAPITAL
---------------------------------------------
Percentage
At June 30, At December 31, Increase /
2007 2006 (Decrease)
---------------------------------------------
Current Assets $ 9,437 $ 15,417 (39%)
Current Liabilities ($8,088,741) ($7,972,868) 1%
Working Capital Deficit ($8,079,304) ($7,957,451) 2%
=============================================
The increase to our working capital deficit was primarily attributable to a
decrease in cash and an increase in convertible notes and provision for lawsuit
settlements as discussed below.
LIABILITIES
---------------------------------------------
Percentage
At June 30, At December 31, Increase /
2007 2006 (Decrease)
---------------------------------------------
Provision for Lawsuit
Settlements $4,834,655 $4,675,137 3%
Accounts Payable $2,161,295 $2,302,417 (6%)
Accrued Liabilities $ 402,243 $ 444,193 (9%)
Short-Term Loans $ 690,548 $ 551,121 25%
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 $257,246 (2006 -
$158,478) and warrant allocation of $241,303 (2006 - $102,185).
During the six months ended June 30, 2007, the Company issued $425,000
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 $375,000 is at $0.02.
In addition, the Company issued to the holders of convertible notes warrants to
purchase 8,500,000 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.
-24-
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 June 30, 2007 are unsecured, non-interest
bearing advances of $148,600 that we anticipate will be converted into shares of
our common stock.
CASH FLOWS
------------------------------
Six Months Ended June 30
------------------------------
2007 2006
---- ----
Net Cash from (used in) Operating Activities ($461,980) ($334,222)
Net Cash from (used in) Financing Activities $456,000 $235,000
Net Increase (decrease) in Cash During Period ($5,980) ($99,222)
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.
-25-
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 $130,083,194 at June 30, 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.
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 units 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 period incurred. Previously, research prototypes
were sold and proceeds reflected by reductions in our research and development
costs. As new technology pre-production manufacturing units are produced and
related non-recurring engineer services are delivered we will recognize the
sales proceeds as revenue.
-26-
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.
-27-
ITEM 3. 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.
-28-
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Subsequent to June 30, 2007 the Company was advised that documents for an action
entitled CRESCENT FUND, LLC V TURBODYNE TECHNOLOGIES, INC. have been filed in
Supreme Court of the State of New York for the County of New York. Service has
not been affected. The action, we understand, seeks $300,000 damages based upon
claims for alleged breaches of contract and covenants of good faith and fair
dealing. Plaintiff received a certificate for 5,000,000 shares of our common
stock to perform investor relations services for us under a contract. The
damages, it is claimed, arose because we failed to give plaintiff an opinion to
seel the shares. It is the Company's position that plaintiff failed to perform
any of the duties and obligations required of it under the aforesaid contract
which was fraudulently induced. Therefore plaintiff is not entitled to retain
the shares. The Company will assert a counterclaim for the return of such shares
and damages based upon plaintiff's breach and fraud.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
The following issuances of securities occurred during the six months ended June
30, 2007.
During the three months ended June 30, 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 $0.02. The note is convertible
at any time prior to payment. The conversion price was two cents ($.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. In addition
during such quarter $40,000 of principal of the aforesaid notes were converted
into 8,000,000 share of our common stock. The 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.
-29-
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.
- --------------------------------------------------------------------------------
-30-
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has caused this quarterly report to be signed on its behalf by
the undersigned, thereunto duly authorized.
TURBODYNE TECHNOLOGIES, INC.
Dated: August 14, 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
-31-