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 SEPTEMBER 30, 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
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TURBODYNE TECHNOLOGIES, INC.
- --------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
NEVADA 95-4699061
- ------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
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: 368,316,577 shares of common stock
issued and outstanding as of NOVEMBER 6, 2007.
Transitional Small Business Disclosure Format (check one): Yes [ ] NO [X]
TURBODYNE TECHNOLOGIES, INC.
INDEX TO FORM 10-QSB
SEPTEMBER 30, 2007
PAGE
NUMBER
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements: 3
Consolidated Balance Sheets as of September 30, 2007 and
December 31, 2006 4
Consolidated Statements of Operations for the three-month
and nine-month periods ended September 30, 2007 and
September 30, 2006 5
Consolidated Statements of Cash Flows for the nine-month
periods ended September 30, 2007 and September 30, 2006 6
Notes to the Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis or Plan of Operations 18
Item 3. Controls and Procedures 26
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 27
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 27
Item 6. Exhibits 28
SIGNATURES 29
2
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE-MONTH PERIODS ENDED
SEPTEMBER 30, 2007 AND 2006
(UNAUDITED - EXPRESSED IN US DOLLARS)
3
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(EXPRESSED IN US DOLLARS)
SEPTEMBER 30 December 31
2007 2006
- -------------------------------------------------------------------------------------------------
ASSETS (UNAUDITED)
CURRENT
Cash $ 40,602 $ 14,745
Prepaid expenses and other current assets 672 672
------------------------------
TOTAL CURRENT ASSETS 41,274 15,417
PROPERTY AND EQUIPMENT, net 11,888 537
------------------------------
TOTAL ASSETS $ 53,162 $ 15,954
=================================================================================================
LIABILITIES AND CAPITAL DEFICIT
LIABILITIES
CURRENT
Accounts payable $ 2,152,834 $ 2,302,417
Accrued liabilities 426,843 444,193
Provision for lawsuit settlements (Note 4) 4,914,414 4,675,137
Loans payable, net of debt discount (Note 3) 829,776 551,121
------------------------------
TOTAL CURRENT LIABILITIES 8,323,867 7,972,868
DEFERRED LICENSING FEE 302,610 319,278
------------------------------
TOTAL LIABILITIES 8,626,477 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
368,316,577 common shares in 2007 (2006 - 345,316,577) 368,317 345,317
Treasury stock, at cost (1,778,580 shares) (1,963,612) (1,963,612)
Additional paid-in capital 123,600,485 122,132,286
Other comprehensive income -
Foreign exchange translation gain 35,119 35,119
Accumulated deficit (130,613,636) (128,825,314)
------------------------------
TOTAL CAPITAL DEFICIT (8,573,315) (8,276,192)
------------------------------
TOTAL LIABILITIES AND CAPITAL DEFICIT $ 53,162 $ 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 NINE-MONTH
PERIODS ENDED PERIODS ENDED
SEPTEMBER 30 SEPTEMBER 30
2007 2006 2007 2006
- --------------------------------------------------------------------------------------------------------------
REVENUE
Licensing fees
$ 5,556 $ 5,556 $ 16,668 $ 16,668
----------------------------------------------------------------
TOTAL REVENUE 5,556 5,556 16,668 16,668
----------------------------------------------------------------
EXPENSES
General and administrative 250,503 257,615 734,702 618,535
Research and development 141,927 106,803 367,603 176,910
Litigation expense 80,355 9,916 239,880 162,896
Depreciation and amortization -- 363 537 1,217
----------------------------------------------------------------
TOTAL EXPENSES
472,785 374,697 1,342,722 959,558
----------------------------------------------------------------
LOSS FROM OPERATIONS (467,229) (369,141) (1,326,054) (942,890)
OTHER INCOME (EXPENSES)
Interest expense (15,259) (7,540) (36,571) (18,244)
Amortization of discount on
convertible notes (124,120) (228,510) (311,234) (228,510)
Debt conversion expense -- (127,500) (422,400) (127,500)
Gain on extinguishment of debt 76,166 537,734 307,937 537,734
----------------------------------------------------------------
LOSS FOR THE PERIOD $ (530,442) $ (194,957) $ (1,788,322) $ (779,410)
================================================================
Loss per common share
BASIC AND DILUTED $ (0.00) $ (0.00) $ (0.00) $ (0.00)
==============================================================================================================
WEIGHTED AVERAGE SHARES - BASIC AND DILUTED 366,751,360 322,406,577 359,016,211 320,907,262
==============================================================================================================
The accompanying notes are an integral part of these unaudited
consolidated financial statements.
5
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED - EXPRESSED IN US DOLLARS)
FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30 2007 2006
- -----------------------------------------------------------------------------------------------
CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES
Net loss for the period $ (1,788,322) $ (779,410)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Amortization of deferred licensing fees (16,668) (16,668)
Depreciation and amortization -- 1,217
Amortization of convertible note discount 311,234 228,510
Debt conversion expense 422,400 127,500
Gain on extinguishment of debt (307,937) (537,734)
Stock issued for services 60,000 50,000
Stock received against litigation expense -- (56,000)
Warrant compensation (Note 2) 317,799 103,190
Decrease in operating assets
Prepaid expenses and other current assets -- (34,000)
Increase in operating liabilities
Accounts payable 158,354 208,415
Accrued liabilities and provision for lawsuit settlements 258,348 193,293
-----------------------------
Net cash used in operating activities (584,792) (511,687)
-----------------------------
INVESTING ACTIVITIES
Purchase capital assets (11,351) --
-----------------------------
Net cash used in investing activities (11,351) --
-----------------------------
FINANCING ACTIVITIES
Proceeds from loans payable 622,000 315,000
Proceeds from exercise of Stock Options and Warrants -- 119,000
-----------------------------
Net cash provided by financing activities 622,000 434,000
-----------------------------
NET INCREASE (DECREASE) IN CASH 25,857 (77,687)
CASH, beginning of period 14,745 100,538
-----------------------------
CASH, end of period $ 40,602 $ 22,851
===============================================================================================
SUPPLEMENTARY DISCLOSURE OF CASH FLOW INFORMATION
Beneficial conversion feature of convertible debt $ 404,453 $ 470,940
Value of warrants issued with convertible debt 186,547 --
Conversion of note to common stock 100,000 --
===============================================================================================
The accompanying notes are an integral part of these consolidated
financial statements.
6
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED - EXPRESSED IN US DOLLARS)
SEPTEMBER 30, 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") 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 other 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.
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 $130,613,636
at September 30, 2007 and a total capital deficit of $8,573,315 at September 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.
7
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED - EXPRESSED IN US DOLLARS)
SEPTEMBER 30, 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
inter-company 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.
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 nine months ended
September 30, $5,556 and $16,668, 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
engineering services are delivered we will recognize the sales proceeds as
revenue.
8
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED - EXPRESSED IN US DOLLARS)
SEPTEMBER 30, 2007 AND 2006
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
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)". Under SFAS 123(R), stock-based
awards will be charged to expense over the vesting period under the
straight-line method. Forfeitures are estimated at the time of grant and
revised, if necessary, in subsequent periods if actual forfeitures differ from
initial estimates.
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 engineering 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.
9
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED - EXPRESSED IN US DOLLARS)
SEPTEMBER 30, 2007 AND 2006
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
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 September 30, 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.
10
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED - EXPRESSED IN US DOLLARS)
SEPTEMBER 30, 2007 AND 2006
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 September 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.
b) During the nine months ended September 30, 2007 the Company issued
20,000,000 shares of common stock for conversion of notes payable.
c) During the three months ended September 30, 2007 the Company issued
3,000,000 shares of common stock for services.
d) Stock Options and Warrants
i. Valuation-general Black-Scholes
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 behaviours.
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.
ii. Options Issued Prior to 2007
2007
NON-EMPLOYEES EMPLOYEES TOTAL
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
Outstanding at
beginning of period 2,505,000 $ 0.08 16,033,300 $ 0.06 18,538,300 $ 0.06
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
===================================================================
11
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED - EXPRESSED IN US DOLLARS)
SEPTEMBER 30, 2007 AND 2006
2. SHARE CAPITAL - CONTINUED
iii. Grant and Vesting of Stock Warrants 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, 7,508,332 were vested and
reflected as an expense for the nine months ended September 30,
2007.
During the nine months ended September 30, 2007 the Company using
the Black-Scholes model recorded $317,799 (2006 - $103,190) of
compensation expense relating to the vesting during such period of
stock warrants previously issued to non-employees for services. The
non cash warrant expense is allocated with $225,444 to general and
administrative expenses and $92,355 to research and development.
The estimated fair value of warrants vested to non-employees during
the nine months ended September 30, 2007 was between $0.023 and
$0.06. Assumptions used to value the warrants: expected dividend
yield Nil%; expected volatility between 147% and 155%; risk-free
interest rate between 4.36 and to 4.96% and an expected life of 7
years.
iv. Total Warrants
At September 30, 2007 the Company had 28,122,776 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 $0.02 per
share and expiration dates between 2007 and 2014. Details of share
purchase warrants for the period ended September 30, 2007 are as
follows:
2007
INVESTORS EMPLOYEES & CONSULTANTS TOTAL
-------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
WARRANTS PRICE WARRANTS PRICE WARRANTS PRICE
-------------------------------------------------------------------
Outstanding and vested at
beginning of period 3,400,000 $ 0.07 6,494,444 $ 0.01 9,894,444 $ 0.03
Granted 11,820,000 $0.025 7,508,332 $ 0.01 19,328,332 $ 0.02
Expired (1,100,000) $ 0.12 -- $ -- (1,100,000) $ 0.12
---------- ---------- -----------
Warrants outstanding and
exercisable at end of period 14,120,000 $ 0.03 14,002,776 $ 0.01 28,122,776 $ 0.02
========== ========== ===========
Weighted average fair value of
warrants granted during the period $ 0.02 $ 0.02 $ 0.01
===================================================================
12
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED - EXPRESSED IN US DOLLARS)
SEPTEMBER 30, 2007 AND 2006
2. SHARE CAPITAL - CONTINUED
At September 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 16,767,224 6.06 $ 0.01
$0.025 - 0.04 10,355,552 4.53 0.026
$0.10 - 0.12 1,000,000 .05 0.10
--------------------------------------------
28,122,776 5.25 $ 0.02
==========
3. LOANS PAYABLE
September December
30, 2007 31, 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 48,029 15,000
Convertible notes payable, net of unamortized discount of
$251,697 ($158,478 - 2006) and warrant valuation of $288,732
($102,185 - 2006) ** 633,147 387,521
---------------------
Total Loans Payable $ 829,776 $551,121
---------------------
** During the nine-month period ended September 30, 2007, the Company issued
$591,000 convertible notes. The notes, issued prior to September 1, 2007, bear
interest at 5% and mature within one year from date of issuance. The notes,
issued after September 1, 2007, bear interest at 18% and mature within six month
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 $541,000 is at $0.02.
In addition, the Company issued, to the holders of convertible notes during the
first nine months of 2007, warrants to purchase 11,820,000 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 11,820,000 warrants was $566,348. Assumptions used to value the
warrants: expected volatility ranging from 112% to 155%; risk-free interest rate
ranging from 4.22% to 5.01% and an expected life of five years. The amount
allocated to the warrants amounts to $186,547 and has been recognized as a
decrease in loans payable and an increase in additional paid in capital.
13
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED - EXPRESSED IN US DOLLARS)
SEPTEMBER 30, 2007 AND 2006
3. 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 is $404,453. This was
recorded as a decrease in loans payable and an increase in additional paid in
capital. For the nine months ended September 30, 2007, the Company recognized
$176,222 in interest expense related to the amortization of the beneficial
conversion feature recorded on these convertible notes. As of September 30,
2007, the remaining balance of the beneficial conversion feature was $228,230.
Prior to 2007, the Company has issued $660,000 convertible notes with detachable
five year warrants to purchase 13,200,000 shares of common stock. The notes bear
interest at 5% and mature within one year from date of issuance. The notes were
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
provided for an exercise price of $0.025 per share. 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.
As indicated above the detachable warrants are valued 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 was $102,185 and has been
recognized as a decrease in loans payable and an increase in additional paid in
capital. As of September 30, 2007, 11,900,000 of the warrants have been
exercised.
The aggregate beneficial conversion feature of these convertible notes issued
prior to September 2006 was $358,477. In relation to the inducement to convert
described above, an additional beneficial conversion feature of $128,042 was
recognized. These were recorded as decreases in loans payable and increases in
additional paid in capital. For the nine months ended September 30, 2007, the
Company recognized $135,011 in interest expense related to the amortization of
the beneficial conversion feature recorded on these convertible notes. As of
September 30, 2007, the remaining balance of the beneficial conversion feature
was $23,467 for these notes. 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 $311,234
during the nine months ended September 30 2007. As of September 30, 2007, the
remaining balance of the beneficial conversion feature of all notes was
$251,697.
14
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED - EXPRESSED IN US DOLLARS)
SEPTEMBER 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 September 30, 2007, the Company has included $3,512,629 (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.
15
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED - EXPRESSED IN US DOLLARS)
SEPTEMBER 30, 2007 AND 2006
4. COMMITMENTS AND CONTINGENCIES
LITIGATION
b) Pacific Baja Bankruptcy - Continued
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.
16
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED - EXPRESSED IN US DOLLARS)
SEPTEMBER 30, 2007 AND 2006
4. COMMITMENTS AND CONTINGENCIES
LITIGATION - 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 September 30,
2007, the Company has included $405,785 in regard to this matter in
the provision for lawsuit settlements.
e) Crescent Fund, LLC
A former consultant has filed a complaint in Supreme Court of the
State of New York for the County of New York for an action entitled
CRESCENT FUND, LLC v TURBODYNE TECHNOLOGIES, INC. The action 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
sell 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 has
filed an answer and counterclaim for the return of such shares and
damages based upon plaintiff's breach and fraud. The Company does
not anticipate a liability therefore has not included an amount 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.
17
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.
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
o Engaged in an engineering program for 'air on demand' applications
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.
18
RESULTS OF OPERATIONS
------------------------------------------------ -----------------------------------------------
Three Months Ended September 30 Nine Months Ended September 30
------------------------------------------------ -----------------------------------------------
Percentage Percentage
2007 2006 Increase 2007 2006 Increase
(Decrease) (Decrease)
----------------- ---------------- ------------- ---------------- ----------------- ------------
Total Revenue $5,556 $5,556 Nil $16,668 $16,668 Nil
Operating Expenses
($472,785) ($374,697) 26% ($1,342,722) ($959,558) 40%
Net Loss from
Operations ($467,229) ($369,141) 27% ($1,326,054) ($942,890) 41%
Other Income
(Expenses) ($63,213) $174,184 (136%) ($462,268) $163,480 (383%)
================= ================ ============= ================ ================= ============
Net (Loss) ($530,442) ($194,957) (172%) ($1,788,322) ($779,410) (1294%)
================= ================ ============= ================ ================= ============
NET REVENUE
------------------------------------------------ -----------------------------------------------
Three Months Ended September 30 Nine Months Ended September 30
------------------------------------------------ -----------------------------------------------
Percentage Percentage
2007 2006 Increase 2007 2006 Increase
----------------- -------------- --------------- ---------------- --------------- --------------
License Fee $5,556 $5,556 Nil $16,668 $16,668 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 nine months
ended September 30, 2007 and 2006, $5,556 and $16,668 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.
19
OPERATING EXPENSES
Operating expenses increased in both the three and nine months ended September
30, 2007 from the comparable periods in 2006.
The primary components of our operating expenses are outlined in the table
below:
----------------------------------------- -------------------------------------------
Three Months Ended September 30 Nine Months Ended September 30
----------------------------------------- -------------------------------------------
Percentage Percentage
Increase Increase
2007 2006 (Decrease) 2007 2006 (Decrease)
----------- ------------- -------------- ------------- ------------- -------------
General and Administrative
Expenses
$250,503 $257,615 (3%) $734,702 $618,535 19%
Research and Development
Expenses $141,927 $106,803 33% $367,603 $176,910 108%
Litigation Expenses $80,355 $9,916 710% $239,880 $162,896 47%
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative costs included management compensation and overhead
and increased for the nine months ended September 30, 2007 due to an increase in
the number of consultants and the amount of consulting fees. For the three and
nine month periods ended September 30, 2007 compensation includes the non cash
warrant expense amount of $64,390 (2006 - $79,545) and $225,444 (2006 -
$103,191), respectively. (Financial Statement Note 2(d))
RESEARCH AND DEVELOPMENT
The increase in research and development costs in 2007 is due to limited
development operations. For the three and nine month periods ended September 30,
2007 compensation includes the non cash warrant expense amount of $66,200 (2006
- - $0) and $92,355 (2006 - $0). (Financial Statement Note 2(d)) 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 most significant component of our litigation expense was the accrued
interest relating to TST, Inc. settlement.
EFFECT OF STOCK BASED COMPENSATION
As indicated above a portion of our expense reflect non cash compensation
arising from the 2006 grant of warrants to purchase 77,200,000 shares of our
common stock to various consultants that we deemed essential to our operations.
Of these warrants, 7,508,332 were vested and reflected as an expense for the
nine months ended September 30, 2007. As of December 31, 2006 6,494,444 were
vested therefore the total vested as of September 30, 2007 was 14,002,776. The
method by which we account for stock based compensation is discussed below under
"Critical Accounting Policies".
20
OTHER INCOME (EXPENSE)
------------------------------------------ -------------------------------------------
Third Quarter Ended September 30 Nine Months Ended September 30
------------------------------------------ -------------------------------------------
Percentage Percentage
Increase Increase
2007 2006 (Decrease) 2007 2006 (Decrease)
------------- ------------- -------------- -------------- -------------- -------------
Gain on Extinguishment of
debt
$76,166 $537,734 (86%) $307,937 537,734 (43%)
Interest Expense ($15,259) ($7,540) 102% ($36,571) ($18,244) 100%
Amortization of Discount on
Convertible Notes ($124,120) ($228,510) (46%) ($311,234) ($228,510) 36%
Debt Conversion Expense -- ($127,500) (100%) ($422,400) ($127,500) 231%
The Company had net additional other expenses for the three and nine month
periods ended September 30, 2007 of $63,213 and $462,268 respectively for
amortization of discount on convertible notes and for related debt conversion
expenses (Financial Statement Note 3). The foregoing is net of gains on
extinguishment of debt.
21
FINANCIAL CONDITION
CASH AND WORKING CAPITAL
----------------------------------------------------------------------
Percentage
At September 30, 2007 At December 31, 2006 Increase / (Decrease)
----------------------------------------------------------------------
Current Assets $41,274 $15,417 168%
Current Liabilities ($8,323,867) ($7,972,868) 4%
Working Capital Deficit ($8,282,593) ($7,957,451) 4%
======================================================================
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 September 30, 2007 At December 31, 2006 Increase / (Decrease)
----------------------------------------------------------------------
Provision for Lawsuit Settlements $4,914,414 $4,675,137 5%
Accounts Payable $2,152,834 $2,302,417 (6%)
Accrued Liabilities $426,843 $444,193 (4%)
Short-Term Loans $829,776 $551,121 51%
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 $251,697 (2006 -
$158,478) and warrant allocation of $288,732 (2006 - $102,185) which
nevertheless represent actual cash obligations (Financial Statement Note 3).
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 September 30, 2007 are unsecured, non-interest
bearing advances of $148,600 that we anticipate will be converted into shares of
our common stock.
22
CASH FLOWS
------------------------------
Nine Months Ended September 30
------------------------------
2007 2006
---- ----
Net Cash from (used in) Operating Activities ($584,792) ($511,687)
Net Cash from (used in) Investing Activities ($11,351) --
Net Cash from (used in) Financing Activities $622,000 $434,000
Net Increase (decrease) in Cash During Period $25,857 ($77,687)
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 $130,613,636 at September 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.
23
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.
24
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.
25
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.
26
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
A former consultant has filed a complaint in Supreme Court of the State of New
York for the County of New York for an action entitled CRESCENT FUND, LLC v
TURBODYNE TECHNOLOGIES, INC. The action 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 sell 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 has filed an answer and counterclaim for the return of such shares
and damages based upon plaintiff's breach and fraud. The Company does not
anticipate a liability therefore has not included an amount in the provision for
lawsuit settlements.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
During the three months ended September 30, 2007 we sold 1.66 units of our
securities in a private placement. Each unit consisted of $100,000 note and
warrants to purchase 2,000,000 of our shares at $0.02, 0.66 units are 5%
convertible notes and 1 unit is an 18% convertible note. The notes are
convertible at any time prior to payment. The conversion price is two cents
($.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.
On August 17, 2007, we issued 3,000,000 restricted shares of our common stock at
a price of $0.02 per share to Sven Liebetanz for investor relations services in
Germany related to a one year contract. The shares were issued pursuant to
Section 4(2) of the Securities Act of 1933 and are exempt from the registration
requirements under that act.
27
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.
28
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: November 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