UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended MARCH 31, 2008
[ ] 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.
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(Exact name of small business issuer as specified in its charter)
NEVADA 95-4699061
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
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) 512-9511
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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 [ ] No [ X ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer' and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer |_| Accelerated filer |_|
Non -accelerated filer |_| Smaller reporting company |X|
(do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act) |_| 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: 434,582,628 shares of common stock
issued and outstanding as of May 14, 2008.
Transitional Small Business Disclosure Format (check one): Yes [ ] NO [X]
TURBODYNE TECHNOLOGIES, INC.
INDEX TO FORM 10-Q
MARCH 31, 2008
PAGE
NUMBER
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets as of March 31, 2008
and December 31, 2007 4
Consolidated Statements of Operations for the three
month periods ended March 31, 2008
and March 31, 2007 5
Consolidated Statements of Cash Flows for the
three month periods ended March 31, 2008
and March 31, 2007 6
Notes to the Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis or Plan of Operations 21
Item 3. Quantitative and Qualitative Disclosures About Market Risk 30
Item 4. Controls and Procedures 31
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 32
Item 1A. Risk Factors N/A
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 32
Item 3. Defaults Upon Senior Securities N/A
Item 4. Submission of Matters to a Vote of Security Holders N/A
Item 5. Other Information N/A
Item 6. Exhibits 32
SIGNATURES 33
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PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE-MONTH PERIODS ENDED
MARCH 31, 2008 AND 2007
(UNAUDITED - EXPRESSED IN US DOLLARS)
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TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(EXPRESSED IN US DOLLARS)
MARCH 31 DECEMBER 31
2008 2007
- -------------------------------------------------------------------------------------------------
ASSETS (UNAUDITED)
CURRENT
Cash $ 54 $ 2,786
Prepaid expenses and other current assets 672 672
------------------------------
TOTAL CURRENT ASSETS 726 3,458
PROPERTY AND EQUIPMENT, net 8,623 9,513
------------------------------
TOTAL ASSETS $ 9,349 $ 12,971
=================================================================================================
LIABILITIES AND STOCKHOLDERS' DEFICIT
LIABILITIES
CURRENT
Accounts payable $ 2,111,638 2,132,439
Accrued liabilities 322,167 292,000
Provision for lawsuit settlements (Note 5) 5,073,932 4,994,173
Loans payable (Note 4) 1,148,920 1,200,973
------------------------------
TOTAL CURRENT LIABILITIES 8,656,657 8,619,585
DEFERRED LICENSING FEE 291,498 297,054
------------------------------
TOTAL LIABILITIES 8,948,155 8,916,639
------------------------------
STOCKHOLDERS' DEFICIT
Share Capital (Note 3)
Authorized
1,000,000 preferred shares, par value $0.001
1,000,000,000 common shares, par value $0.001
Issued
12,675 preferred shares 12 12
434,582,628 common shares in 2008 (2007 - 380,459,434) 434,583 380,460
Treasury stock, at cost (5,278,580 shares) (1,963,612) (1,963,612)
Additional paid-in capital 125,876,613 124,831,388
Other comprehensive income -
Foreign exchange translation gain 35,119 35,119
Accumulated deficit (133,321,521) (132,187,035)
------------------------------
TOTAL STOCKHOLDERS' DEFICIT (8,938,806) (8,903,668)
------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 9,349 $ 12,971
=================================================================================================
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 OPERATIONS
(UNAUDITED - EXPRESSED IN US DOLLARS)
FOR THE THREE-MONTH PERIODS ENDED MARCH 31 2008 2007
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(AS RESTATED)
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LICENSING FEES $ 5,556 $ 5,556
------------------------------
EXPENSES
Selling, general and administrative 255,848 235,040
Research and development costs 110,558 80,941
Litigation expense 82,065 79,759
Depreciation and amortization 890 537
------------------------------
TOTAL EXPENSES 449,361 396,277
------------------------------
LOSS FROM OPERATIONS (443,805) (390,721)
OTHER INCOME (EXPENSE)
Interest expense (22,030) (8,990)
Amortization of discount on convertible notes (Note 4) (240,194) (155,902)
Debt conversion expense (Note 4) (426,857) (422,400)
Gain on extinguishment of debt -- 122,050
------------------------------
NET LOSS BEFORE TAXES (1,132,886) (855,963)
Income tax expense (1,600) --
------------------------------
NET LOSS FOR THE PERIOD $ (1,134,486) $ (855,963)
==========================================================================================
NET LOSS PER COMMON SHARE - BASIC AND DILUTED $ (0.00) $ (0.00)
==========================================================================================
WEIGHTED AVERAGE SHARES - BASIC AND DILUTED 383,241,566 349,272,133
==========================================================================================
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 THREE-MONTH PERIODS ENDED MARCH 31 2008 2007
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(AS RESTATED)
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OPERATING ACTIVITIES
Net loss for the period $(1,134,486) $(855,963)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Amortization of deferred licensing fees (5,556) (5,556)
Depreciation and amortization 890 537
Gain on extinguishment of debt -- (122,050)
Amortization of discount on convertible debt (Note 4) 240,194 155,902
Stock for services 180,000 --
Debt conversion expense (Note 4) 426,857 422,400
Warrant compensation (Note 3) 54,600 87,405
(Increase) decrease in operating assets
Prepaid expenses and other current assets -- --
Increase (decrease) in operating liabilities
Accounts payable (20,801) (28,210)
Accrued liabilities and provision for lawsuit settlements 132,070 64,349
----------------------
Net cash used in operating activities (126,232) (281,186)
----------------------
FINANCING ACTIVITIES
Notes Payable 123,500 356,000
----------------------
Net cash provided by financing activities 123,500 356,000
----------------------
NET INCREASE (DECREASE) IN CASH (2,732) 74,814
CASH, beginning of period 2,786 14,745
----------------------
CASH, end of period $ 54 $ 89,559
=========================================================================================
SUPPLEMENTARY DISCLOSURE OF NON-CASH INFORMATION
BENEFICIAL CONVERSION FEATURE OF CONVERTIBLE DEBT $ 54,198 $ 220,587
Value of warrants issued with convertible debt 24,198 79,896
Conversion of interest and notes payable to common stocks 359,494 60,000
=========================================================================================
The accompanying notes are an integral part of these unaudited
consolidated financial statements.
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TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited - Expressed in US Dollars)
MARCH 31, 2008 AND 2007
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1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Turbodyne Technologies, Inc., a Nevada corporation, and its subsidiaries (the
"Company") engineer, develop and market products designed to enhance
performance and reduce emissions of internal combustion engines.
The Company'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 and Rule 8-03 of Regulation S-X. 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, 2007 and
2006 included in the Company's 10-KSB Annual Report. The Company follows the
same accounting policies in the preparation of interim reports.
Results of operations for the interim periods are not indicative of annual
results.
GOING CONCERN
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. The Company has
suffered net operating losses in recent periods, has an accumulated deficit
of $133,321,521 at March 31, 2008 and a total capital deficit of $8,938,806
at March 31, 2008. 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.
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TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited - Expressed in US Dollars)
MARCH 31, 2008 AND 2007
- --------------------------------------------------------------------------------
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements, stated in United States
dollars, include the accounts of Turbodyne Technologies, Inc. and its wholly
owned subsidiaries, Turbodyne Systems, Inc., Turbodyne Germany Ltd.,
Electronic Boosting Systems, Inc. and Pacific Baja Light Metals Corp.
("Pacific Baja"). All intercompany accounts and transactions have been
eliminated on consolidation.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization of property and equipment is computed using the
straight-line method over estimated useful lives as follows:
Machinery and equipment - 7 to 15 years
Furniture and fixtures - 5 to 10 years
LICENSES
Licenses are recorded at cost and are amortized over the estimated useful
life of 18 years.
VALUATION OF LONG-LIVED ASSETS
The Company periodically reviews the carrying value of long-lived assets for
indications of impairment in value and recognizes impairment of long-lived
assets in the event the net book value of such assets exceeds the estimated
undiscounted future cash flows attributable to such assets. Long-lived assets
to be disposed of by sale are to be measured at the lower of carrying amount
or fair value less cost of sale whether reported in continuing operations or
in discontinued operations. No impairment was required to be recognized
during 2008 and 2007.
RECOGNITION OF REVENUE
License fee revenue is recognized over the term of the license agreement.
During the year ended December 31, 2003, $400,000 in license fees were
deferred and are being amortized over 18 years. As a result, for the quarter
ended March 31, 2008 $5,556 ($5,556 in 2007) of licensing fees was recognized
as income.
EARNINGS (LOSS) PER SHARE
Earnings (loss) per share is computed in accordance with SFAS No. 128,
"Earnings Per Share". Basic earnings (loss) per share is calculated by
dividing the net income (loss) available to common stockholders by the
weighted average number of shares outstanding during the period. Diluted
earnings per share reflects the potential dilution of securities that could
share in earnings of an entity. In a loss period, dilutive common equivalent
shares are excluded from the loss per share calculation as the effect would
be anti-dilutive.
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TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited - Expressed in US Dollars)
MARCH 31, 2008 AND 2007
- --------------------------------------------------------------------------------
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Fair Value of Financial Instruments
The fair values of the Company's cash, term debts, accounts payable, accrued
liabilities and loans payable approximate their carrying values because of
the short-term maturities of these instruments.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure
of contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation under the fair value method
in accordance with Statement of Financial Accounting Standards No. 123
(revised 2004), "Share Based Payment" "SFAS 123(R)".
RESEARCH AND DEVELOPMENT
Research and development costs related to present and future products have
been charged to operations in the period incurred.
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.
-9-
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TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited - Expressed in US Dollars)
MARCH 31, 2008 AND 2007
- --------------------------------------------------------------------------------
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
COMPREHENSIVE INCOME
The Company has adopted SFAS No. 130, "Reporting Comprehensive Income". SFAS
No. 130 establishes standards to measure all changes in equity that result
from transactions and other economic events other than transactions with
owners. Comprehensive income is the total of net earnings (loss) and all
other non-owner changes in equity. Except for net earnings (loss) and foreign
currency translation adjustments, the Company does not have any transactions
and other economic events that qualify as comprehensive income as defined
under SFAS No. 130. As foreign currency translation adjustments were
immaterial to the Company's consolidated financial statements, net earnings
(loss) approximated comprehensive income for the quarter ended March 31, 2008
and 2007.
NEW ACCOUNTING PRONOUNCEMENTS
In September 2006, the FASB issued Statement No. 158, "Employer's Accounting
for Defined Benefit Pension and Other Postretirement Plans - an amendment of
FASB Statements No. 87, 88, 106, and 132(R)" ("SFAS 158"). This statement
requires the full recognition, as an asset or liability, of the overfunded or
underfunded status of a company-sponsored postretirement benefit plan.
Adoption of this statement is required effective for the Company's fiscal
year ending December 31, 2007. The adoption of SFAS 158 has not had a
material effect on the Company as it has no defined benefit plans
In September 2006, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard 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.
SFAS 157 was effective for the Company on January 1, 2008. The Company plans
to adopt the provisions of SFAS No. 157 on July 1, 2008 and is currently
assessing the impact of the adoption of SFAS No. 157 on its results of
operations and financial condition.
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 was effective for the Company on January 1, 2008. The Company
plans to adopt the provisions SFAS No. 159 on July 1, 2008 and is currently
assessing the impact of the adoption of SFAS No. 159 on its results of
operations and financial condition.
-10-
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TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited - Expressed in US Dollars)
MARCH 31, 2008 AND 2007
- --------------------------------------------------------------------------------
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
NEW ACCOUNTING PRONOUNCEMENTS - CONTINUED
In December 2007, the FASB issued SFAS No. 141R, "Business Combinations"
("SFAS 141R"). SFAS 141R revises the principles and requirements for how the
acquirer recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, any non controlling interest in the
acquiree, and the goodwill acquired in a business combination or gain from a
bargain purchase. SFAS 141R also revises the principles and requirements for
how the acquirer determines what information to disclose to enable users of
the financial statements to evaluate the nature and financial effects of the
business combination. This pronouncement will be effective for the Company on
January 1, 2009. The Company is currently evaluating the impact, if any, that
SFAS 141R will have on its financial position or results of operations.
Also in December 2007, the FASB issued SFAS No. 160, "Non controlling
Interest in Consolidated Financial Statements -- an amendment of ARB No. 51"
("SFAS 160"). SFAS 160 amends ARB No. 51 to establish accounting and
reporting standards for the non controlling interest in a subsidiary and for
the deconsolidation of a subsidiary. This pronouncement will be effective for
the Company on January 1, 2009. The Company is currently evaluating the
impact, if any, that SFAS 160 will have on its financial position or results
of operations.
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative
Instruments and Hedging Activities" ("SFAS No. 161"). SFAS 161 requires
companies with derivative instruments to disclose information that should
enable financial-statement users to understand how and why a company uses
derivative instruments, how derivative instruments and related hedged items
are accounted for under FASB Statement No. 133 "Accounting for Derivative
Instruments and Hedging Activities" and how derivative instruments and
related hedged items affect a company's financial position, financial
performance and cash flows. SFAS 161 is effective for financial statements
issued for fiscal years and interim periods beginning after November 15,
2008. We are currently evaluating the impact, if any, that SFAS 161 will have
on our financial position or results of operations.
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TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited - Expressed in US Dollars)
MARCH 31, 2008 AND 2007
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2 RESTATEMENT OF 2007 FINANCIAL STATEMENTS
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The Company is restating its previously issued March 31, 2007 consolidated
financial statements for the following reasons: unrecorded beneficial
conversion feature of convertible debt and related amortization, unrecorded
value of detachable warrants issued with the convertible debt and related
amortization, unrecorded inducement expense as a result of Company's
modification of conversion terms and terms for the exercise of warrants to
induce conversion of debt and warrants exercise.
Previously
Reported Restated Restated
(Original and Increase (Amendment Increase (Amendment
Amendment No. 1) (Decrease) No. 2) (Decrease) No. 3)
TOTAL ASSETS $ 90,231 $ -- $ 90,231 $ -- $ 90,231
Loans payable 995,094 (378,210) 616,884 (95,922) 520,962
Total Current Liabilities 8,321,940 (378,210) 7,943,730 (95,922) 7,847,808
TOTAL LIABILITIES 8,635,662 (378,210) 8,257,452 (95,922) 8,161,530
Additional paid in capital 121,815,108 1,199,983 123,015,091 406,178 123,421,269
Accumulated deficit (128,789,376) (821,772) (129,611,148) (310,256) (129,921,404)
TOTAL CAPITAL DEFICIT (8,545,431) 378,210 (8,167,221) 95,922 (8,071,299)
STATEMENT OF OPERATIONS
Amortization of convertible notes
discount relating to -
Beneficial conversion feature* 166,857 255,543 422,400 -- 422,400
Warrants 85,773 -- 85,773 70,129 155,902
NET LOSS (637,459) (148,374) (785,834) (70,129) (855,963)
*THE COMPANY DID NOT INITIALLY RECOGNIZE THE MATERIAL MODIFICATION OF
CONVERSION TERMS AS AN EXTINGUISHMENT OF DEBT, RESULTING IN FAILURE TO WRITE
OFF UNAMORTIZED PORTION OF DEBT DISCOUNT RELATING TO THIS EXTINGUISHED DEBT.
-12-
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TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited - Expressed in US Dollars)
MARCH 31, 2008 AND 2007
- --------------------------------------------------------------------------------
3. SHARE CAPITAL
Transactions not disclosed elsewhere in these consolidated interim financial
statements are as follows:
a) Authorized Capital
At the Annual General Meeting held on June 30, 2004, the shareholders
approved an increase of authorized capital to 1,000,000,000 common shares.
In 2003, 150,000 of the 1 million preferred shares were designated as
Series X preferred shares. These shares have a par value of $0.001 per
share with each share being convertible into 100 common shares at the
discretion of the holder. As of March 31, 2008, 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 three months ended March 31, 2008 the Company issued 54,123,194
shares of common stock, 48,123,194 for conversion of notes and interest
payable and 6,000,000 for payment of services. During the three months
ended March 31, 2007, the Company issued 12,000,000 shares of common stock
for conversion of notes payable.
c) Stock Options
The determination of fair value of share-based payment awards to
employees, directors and non-employees on the date of grant using the
Black-Scholes model is affected by the Company's stock price as well as
assumptions regarding a number of highly complex and subjective variables.
These variables include, but are not limited to the expected stock price
volatility over the term of the awards, and actual and projected employee
stock option exercise behaviors. Management has used historical data to
estimate forfeitures. The risk-free rate is based on U.S. Treasury rates
in effect during the corresponding period of grant. The expected
volatility is based on the historical volatility of the Company's stock
price.
-13-
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TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited - Expressed in US Dollars)
MARCH 31, 2008 AND 2007
- --------------------------------------------------------------------------------
3. SHARE CAPITAL - CONTINUED
GRANT OF STOCK OPTIONS TO NON-EMPLOYEES FOR SERVICES
During 2006 and 2007, we granted warrants to purchase 78,200,000 shares of
our common stock to various consultants that we deemed essential to our
operations. Of these warrants, 2,169,444 were vested and reflected as an
expense for the three months ended March 31, 2008.
During the three months ended March 31, 2008 the Company recorded $54,600
($87,405 in 2007) of compensation expense relating to stock warrants
issued to non-employees for services rendered during the period.
The estimated fair value of warrants issued to non-employees during the
three months ended March 31, 2008 ranged from $0.0214 to $0.0294.
Assumptions used to value the warrants: expected dividend yield Nil%;
expected volatility of 101.36% and 157.41%; risk-free interest rate of
2.88%, 2.96% and 3.19% and an expected life of 7 years.
d) Stock Purchase Warrants
At March 31, 2008 the Company had 35,461,664 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 $0.04 per share with a
weighted average exercise price of $0.016 per share and expiration dates
between 2011 and 2015. Details of share purchase warrants for the quarter
ended March 31, 2008 are as follows:
2008
INVESTORS EMPLOYEES & CONSULTANTS TOTAL
-------------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
WARRANTS PRICE WARRANTS PRICE WARRANTS PRICE
---------- ----------- ------------- ------------ ------------ --------------
Outstanding at beginning 15,120,000 $ 0.02 16,172,220 $ 0.01 31,292,220 $ 0.02
of period
Granted 2,000,000 $ 0.02 2,169,444 $ 0.01 4,169,444 $ 0.02
---------- ---------- ----------
Warrants outstanding and
exercisable at end of 17,120,000 $ 0.02 18,341,664 $ 0.01 35,461,664 $ 0.02
period
========== ========== ==========
Weighted average fair
value of
warrants granted during $ 0.02 $ 0.01 $ 0.01
the period
=================================================================================
-14-
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TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited - Expressed in US Dollars)
MARCH 31, 2008 AND 2007
- --------------------------------------------------------------------------------
3. SHARE CAPITAL - CONTINUED
At March 31, 2008, 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 17,508,336 6.07 $0.01
$0.025 - 0.04 17,953,328 4.29 0.02
----------------- ------------------------ ----------------
35,461,664 5.17 $0.02
=================
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4. LOANS PAYABLE
March 31, December 31,
2008 2007
------------ ------------
Unsecured, non-interest bearing loan payable, due on
demand from stockholders and other parties $ 138,600 $ 138,600
Note payable, 5% per annum 49,179 46,000
Note payable, 18% per annum 56,800 33,300
Convertible notes payable net of unamortized discount of $67,023 and
$24,406 and warrant valuation of $199,726 and $53,501 in 2008
and 2007, respectively** 904,341 983,073
---------- ----------
Total Loans Payable $1,148,920 $1,200,973
========== ==========
** During the quarter ended March 31, 2008, the Company issued $100,000
convertible notes. The note bears interest at 18% and matures within six
months from date of issuance. The Note is convertible, at the option of
the holder, to shares of the Company's common stock. The Company also
received $23,500 for a short term borrowing from a certain lender payable
with interest at 18% per annum.
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-15-
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TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited - Expressed in US Dollars)
MARCH 31, 2008 AND 2007
- --------------------------------------------------------------------------------
4. LOANS PAYABLE - CONTINUED
As of March 31, 2008, convertible notes consist of:
Issued Issued Issued Issued
through from from From
September Nov 06 to March 07 to Sep 07 to
2006 Feb 07 Aug 07 Mar 08 Total
-------------- --------------- -------------- -------------- --------------
Proceeds from issuances of
convertible debt $ 615,000 $ 95,000 $ 441,000 $ 300,000 $ 1,451,000
Less: Debt conversions (380,000) -- (150,000) -- (530,000)
------------ ------------ ------------ ------------ ------------
235,000 95,000 291,000 300,000 921,000
------------ ------------ ------------ ------------ ------------
Discount on convertible debt
Value allocated to warrants 88,144 8,041 118,485 75,233 289,903
Beneficial conversion feature 521,756 86,959 322,515 203,163 1,134,393
------------ ------------ ------------ ------------ ------------
609,900 95,000 441,000 278,396 1,424,296
Accumulated amortization
of value allocated to warrants (88,144) (8,041) (112,896) (56,416) (265,497)
Accumulated amortization of
beneficial conversion feature (512,429) (86,959) (306,809) (161,173) (1,067,370)
------------ ------------ ------------ ------------ ------------
9,327 -- 21,295 60,807 91,429
Accrued Interest 35,553 5,790 19,130 14,297 74,770
------------ ------------ ------------ ------------ ------------
Net Convertible Debt $ 261,226 $ 100,790 $ 288,835 $ 253,490 $ 904,341
============ ============ ============ ============ ============
Lower of
70% of
Original conversion price market or $ 0.005 $ 0.020 $ 0.020 --
$0.025
Modified conversion price $ 0.005 N/A N/A N/A --
Interest rate 5% 5% 5% 18% --
Maturity from date of issuance 1 year 1 year 1 year 6 months --
Warrants issued 12,300,000 1,900,000 8,820,000 6,000,000 29,020,000
Warrants exercised (11,900,000) -- -- -- (11,900,000)
------------ ------------ ------------ ------------ ------------
Warrants remaining 400,000 1,900,000 8,820,000 6,000,000 17,120,000
------------ ------------ ------------ ------------ ------------
Market value of warrants at
date of issuance $ 150,884 $ 48,863 $ 398,872 $ 182,111 $ 780,730
Assumptions for Black-Scholes
valuation of warrants
Original exercise price $ 0.025 $ 0.025 $ 0.020 $ 0.020
Modified exercise price $ 0.010 N/A N/A N/A
Term 5 years 5 years 5 years 5 years
Volatility rate 146% - 151% 153% - 155% 112% - 155% 109% - 155%
Risk free interest rate 4.61% - 5.02% 4.45% - 4.69% 4.46% - 5.01% 2.93% - 5.01%
-16-
================================================================================
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited - Expressed in US Dollars)
MARCH 31, 2008 AND 2007
- --------------------------------------------------------------------------------
4. LOANS PAYABLE - CONTINUED
- --------------------------------------------------------------------------------
For the years ended December 31, 2007 and 2006, the Company issued $691,000
and $660,000, respectively, of convertible notes. For the three months
ending March 31, 2008 the Company issued $100,000 of convertible notes. All
of the convertible notes were issued with detachable warrants to purchase
13,820,000, 13,200,000 and 2,000,000 shares of the Company's common stock,
respectively, at $0.025 per share. In recording the transaction, the
Company allocated the value of the proceeds to the convertible notes and
the warrants based on their relative fair values. Fair value of the
warrants was determined using the Black-Scholes valuation model. It was
also determined that the convertible notes contained a beneficial
conversion feature since the fair market value of the common stock issuable
upon the conversion of the notes exceeded the value allocated to the notes.
The value of the beneficial conversion feature and the value of the
warrants have been recorded as a discount to convertible notes and are
being amortized over the term of the notes using the straight-line method.
For the years ended December 31, 2007 and 2006, amortization of the
discount was $864,485 and $568,168, respectively. For the three months
ending March 31, 2008 the amortization of the discount was $240,194.
In September 2006, the Company offered to decrease the note conversion
price to $0.005 per share if the note holders exercised their warrants at
the reduced exercise price of $0.01 by September 30, 2006. In consideration
for the reduction of conversion price, the maturity of the notes extended
for another year. As a result of the inducement to exercise the warrants
and to convert the notes, the Company recognized an expense of $988,686 and
$345,357 for the years ended December 31, 2007 and 2006, respectively, with
a corresponding increase in additional paid-in capital. For the three
months ending March 31, 2008 the Company recognized an expense of $426,857.
Prior to the three months ended March 31, 2008, 11,900,000 of the warrants
have been exercised.
The modification of conversion terms was substantial such that it was
considered an extinguishment of debt. Accordingly, the unamortized discount
on convertible notes was written off and included in total amortization for
2006. Conversion of notes in 2007 and 2006 also resulted in the write off
of the corresponding unamortized discount.
In February 2007, the Company changed the per share conversion price from
$0.005 to $0.02 for new lenders. 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 months from date of issuance. The warrants are to purchase the
Company's common stock at $0.025 per share expiring in five years.
For the year ended December 31, 2007, the Company recognized $864,485 in
interest expense related to the amortization of the value of the detachable
warrants and beneficial conversion feature recorded on these convertible
notes. As of March 31, 2008, the remaining balance of the beneficial
conversion feature was $67,023 and detachable warrants were $24,406.
-17-
================================================================================
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited - Expressed in US Dollars)
MARCH 31, 2008 AND 2007
- --------------------------------------------------------------------------------
5.COMMITMENTS AND CONTINGENCIES
The Company is party to various legal claims and lawsuits that have arisen
in the normal course of business. There have been no material changes in
the status of these matters since the issuance of the most recent audited
annual financial statements.
LITIGATION
a) TST, Inc.
In March 2000, TST, Inc. ("TST"), a vendor to a subsidiary of
Pacific Baja (Note 4(b)) filed an action against the Company
alleging that in order to induce TST to extend credit to a
subsidiary of Pacific Baja, the Company executed guarantees in
favor of TST. TST alleged that the subsidiary defaulted on the
credit facility and that the Company is liable as guarantor.
Agreed to the immediate entry of judgment against the Company in
the amount of $2,068,078 plus interest from the date of entry at
the rate of 10% per annum. The amount of this judgment would
immediately increase by any amount that TST is compelled by
judgment or court order or settlement to return as a preferential
transfer in connection with the bankruptcy proceedings of Pacific
Baja; and TST cannot execute on its judgment until Turbodyne
either: (a) files a voluntary bankruptcy case; (b) is the subject
of an involuntary case; or (c) effects an assignment for the
benefit of creditors.
Any proceeds received by TST or its president from the sale of
the issued shares will be automatically applied as a credit
against the amount of the judgment against the Company in favor
of TST. Prior to March 31, 2004, 147,000 shares issued in
connection with the TST settlement had been sold which have
reduced the provision for lawsuit settlement by $23,345.
At March 31, 2008, the Company has included $3,672,147 ($3,592,387 in 2007)
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 also been included in the provision for lawsuit
settlements.
----------- -----------
March 31, 2008 December 31, 2007
----------- -----------
Settlement amount $ 2,068,079 $ 2,068,079
$ 1,544,413 $ 1,464,653
Interest
$ 83,000 $ 83,000
Preference payment
($ 23,345) ($ 23,345)
Proceeds of stock sale
----------- -----------
Total $ 3,672,147 $ 3,592,387
=========== ===========
-18-
================================================================================
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited - Expressed in US Dollars)
MARCH 31, 2008 AND 2007
- --------------------------------------------------------------------------------
5. COMMITMENTS AND CONTINGENCIES - LITIGATION CONTINUED
b) Pacific Baja Bankruptcy
In July 1999, a major creditor of the Company's wholly-owned major
subsidiary, Pacific Baja, began collection activities against
Pacific Baja which threatened Pacific Baja's banking relationship
with, and source of financing from, Wells Fargo Bank. As a result,
Pacific Baja and its subsidiaries commenced Chapter 11 bankruptcy
proceedings on September 30, 1999
..
In September 2001, the Pacific Baja Liquidating Trust (the "Trust")
commenced action against us in the aforesaid Bankruptcy Court. The
Trust was established under the Pacific Baja bankruptcy proceedings
for the benefit of the unsecured creditors of Pacific Baja.
The Company vigorously contested the Complaint until April 22, 2005
when the Company entered into a stipulation for entry of judgment
and assignment in the Pacific Baja bankruptcy proceedings for
$500,000 to be issued in common stock or cash or a combination.
Additionally the Company assigned to the bankruptcy Trust the rights
to $9,500,000 claims under any applicable directors and officers
liability insurance policies. The bankruptcy Trust also agreed to a
covenant not to execute against the Company regardless of the
outcome of the insurance claims.
The Company has completed the assignment of its insurance claims,
but has not completed the cash/stock payment that was to be paid to
the Trust by December 9, 2005. We are negotiating with the Trustee
regarding this default.
c) Former Officer
On May 20, 2004, one of the Company's former officers, Mr. Peter
Hofbauer, filed a motion against the Company alleging that the
Company failed to pay him the sum of $369,266 pursuant to the terms
of a purported settlement agreement, allegedly made for the purposes
of settling amounts owed to the former officer for services to the
Company. On August 3, 2004 a writ of attachment was applied to the
Company's Certificate of Deposit for $315,000. On October 25, 2004
the former officer and the Company signed and filed with the court a
Stipulation re: Settlement and Order. The stipulation ordered the
Company to deliver 4,000,000 shares of common stock without
restrictions to be used by the former officer to raise funds to
settle amounts owed to him by the Company. As funds are raised to
settle amounts owed, writs will be reversed from the Certificate of
Deposit. 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.
-19-
================================================================================
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited - Expressed in US Dollars)
MARCH 31, 2008 AND 2007
- --------------------------------------------------------------------------------
5. 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 March 31,
2008, 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. Subsequent to
year end the Company agreed to a nonmonetary settlement permitting
the plaintiff to retain a majority of its shares but releasing the
Company from all liability with any payments.
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.
-20-
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-Q, 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-Q
are in U.S. dollars unless otherwise stated.
We are an engineering Company and have been engaged, for over ten years, in the
design and development of forced-air induction (air-charging) technologies that
improve the performance of gas and diesel internal combustion engines. Optimum
performance of an internal combustion engine requires a proper ratio of fuel to
air. Power available from the engine is reduced when a portion of the fuel is
not used. In a wide range of gas and diesel engines additional air is needed to
achieve an optimal result. Traditional engineered solutions for this problem use
belts or exhaust gas (superchargers or turbochargers) to supply additional air
to an engine. Turbodyne, instead, uses electric motors to supply additional air.
Because an electric motor can be engaged more quickly, compared to the
mechanical delays inherent in a belt or exhaust gas device, Turbodyne's products
reduce this `turbolag' and otherwise adds to the effectiveness of gas and diesel
engines used in automotive, heavy vehicle, marine, and other internal combustion
installations.
Since September 2005 when it took office management has obtained some additional
financing and has conducted limited business activity including:
o Updating our financial statements and required SEC filings
o Assessment of our technology including patents and other rights
-21-
o Limited development of our Turbopac(TM) and related product line
o Filing for protection of new intellectual properties related to our
products
o Review and negotiate to settle outstanding litigation and liabilities
o Formulating business and marketing plans
There is no assurance we will be able to obtain sufficient financing to
implement full scale operations.
In February 2007 the Company filed a provisional application in the United
States Patent and Trademark Office for a TurboPac related technology. Referred
to as the 'TurboFlow', the patent disclosure includes application of the
technology to vehicle types commonly referred to as 'hybrids' or 'low emission
vehicles'. The disclosed technology applies advanced controls, energy
management, and a TurboPac related technology to avoid problems encountered when
using traditional turbo- or super- charging air injection units with a small
engine in those types of vehicles.
Turbodyne's longer term goal is to be able to work with the vehicle
manufacturers to improve new cars' miles per gallon or liters per 100
kilometers. By combining our products with exhaust turbochargers, smaller
engines can be used to reduce vehicle weight while maintaining initial
acceleration. Also identified were the product requirements we needed to be
successful in the vehicle marketplace. These were:-
1. Reduce the unit cost,
2. Simplify the manufacturing process,
3. Increase unit reliability, and
4. Reduce electrical power consumption.
In addition, we have substantially reduced the weight of our products and made
the control systems smaller and more useful, something that is extremely
important for the small engine segment and the retrofit market.
We believe that these developments provide the Company with potential for
substantial growth but this will require investment. We have the following major
goals, given appropriate funding:-
o To have products in the market place by the fourth quarter or
before. We are working on three market areas.
o To get operating income close to, or at breakeven by the first quarter
of 2009 or before and positive for all of 2009.
There is no assurance that we will obtain sufficient funding or otherwise be
able to achieve our goals.
-22-
RESULTS OF OPERATIONS
------------------------------------------------------------
First Quarter Ended March 31
------------------------------------------------------------
Percentage
2008 2007 Increase
(Decrease)
-------------------- -------------------- ------------------
Total Revenue $5,556 $5,556 Nil
Operating Expenses ($449,361) ($396,277) 13%
Net Loss from Operations ($443,805) ($390,721) 14%
Other Income (expense), net ($690,681) ($465,242) (48%)
==================== ==================== ==================
Net Loss ($1,134,486) ($855,963) (33%)
==================== ==================== ==================
NET REVENUE
------------------------------------------------------------
First Quarter Ended March 31
------------------------------------------------------------
Percentage
2008 2007 Increase
-------------------- -------------------- ------------------
License Fee $5,556 $5,556 Nil
==================== ==================== ==================
We had no revenue in 2008 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 each of the quarters ended March
31, 2008 and 2007, $5,556 of licensing fees was recognized as income. Our
continued net losses from operations reflect our continued operating expenses
and our inability to generate revenues. We believe that we will not be able to
generate any significant revenues from TurboPac(TM)/TurboFlow(TM) until we
complete our productiOn models and enter into commercial arrangements.
COSTS OF SALES
We had no sales in 2008 and 2007; therefore we did not have any costs of sales
during any portion of these years
-23-
OPERATING EXPENSES
Operating expenses increased from the comparable period in 2007. The primary
components of our operating expenses are outlined in the table below:
First Quarter Ended March 31
---------------------------------
Percentage
2008 2007 Increase
(Decrease)
Selling, General and Administrative Expenses $255,848 $235,040 8.92%
Research and Development Expenses $110,558 $80,941 36.6%
Litigation Expenses $82,065 $79,759 2.9%
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative costs included management compensation and overhead
and including non cash warrant expense amount of $35,795 ($87,405 in 2007).
(Financial Statement Note 3)
RESEARCH AND DEVELOPMENT
The increase in research and development costs in 2008 is due to increased
spending for limited development operations and the increase in the non cash
warrant expense amount of $18,805. For the quarter ending March 31, 2007 the non
cash warrant expense was included in selling, general and administrative
expenses. 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 as well as additional legal fees to
defend a new action discussed in Financial Statement Note 5.
COMPENSATION EXPENSE
During 2006 and 2007, warrants to purchase 78,200,000 shares of our common stock
were included as additional compensation in the contracts of various consultants
that we deemed essential to our operations. Of these warrants, 2,169,444 were
vested and reflected as an expense for the three months ended March 31, 2008. As
of December 31, 2007 9,677,776 warrants were vested and reflected as an expense
and 6,494,444 shares vested in 2006. Therefore the total vested as of March 31,
2008 was 18,341,664. As a result, we recognized $54,600 of non-employee
compensation expense during the quarter ended March 31, 2008 compared to $87,405
during the quarter ended March 31, 2007. From time to time we may grant a
significant number of options or warrants to purchase common stock to
non-employees.
-24-
OTHER INCOME (EXPENSE)
--------------------------------------------
Quarter Ending March 31
--------------------------------------------
Percentage
2008 2007 Increase
(Decrease)
------------ --------------- ---------------
Debt Relief -- $122,050 (100%)
------------ --------------- ---------------
Other Expenses
Interest Expense ($22,030) ($8,990) 145%
Amortization of Discount on Convertible Notes ($240,194) ($155,902) 54%
Inducement Expense ($426,857) ($422,400) (1%)
------------ --------------- ---------------
Income Tax Expense (1,600) -- 100%
------------ --------------- ---------------
Total Other Expenses ($690,681) ($587,292) (18%)
------------ --------------- ---------------
Net Other Income and Expenses ($690,681) ($465,242) (49%)
============ =============== ===============
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 debt
relief of accounts payable.
The Company had other expenses for the quarter ending March 31, 2008 of $667,051
compared to $587,302 in 2007. As indicated above, these expenses consisted of
amortization of discounts on convertible notes and value of detachable warrants
and for related debt conversion expenses (Financial Statement Note 7).
NET INCOME / LOSS
Our net loss for the Quarter ending March 31 2008 increased to $1,134,486 from
net loss of $855,963 for the Quarter Ending March 31, 2007, representing an
increase of 33%. The increase is directly related to the increase in expenses
from the amortization of discounts on convertible notes and value of
detachable warrants and for related debt conversion expenses since the operating
loss increased by $53,084 or 13%.
We believe, however that recent technical developments provide the Company with
potential for substantial growth but this will require investment. We have the
following major goals, given appropriate funding:
o To have products in the market place by the fourth quarter of 2008 or
before. We are working on three market areas.
o To get operating income close to, or at breakeven by the first quarter of
2009 or before and positive for all of 2009.
If we do not achieve our goals we anticipate for the foreseeable future we will
continue to have losses as we will incur operating expenses in completing our
development without any revenues. Such losses will continue until such time as
we generate revenue from sales or licensing of our products in excess of our
operating expenses.
-25-
FINANCIAL CONDITION
CASH AND WORKING CAPITAL
--------------------------- --------------------------- -------------------------
March 31, 2008 December 31, 2007 Percentage
Increase / (Decrease)
--------------------------- --------------------------- -------------------------
Current Assets $726 $3,458 (79.0%)
Current Liabilities ($8,656,657) ($8,619,585) 0.4%
--------------------------- --------------------------- -------------------------
Working Capital Deficit ($8,655,931) ($8,616,127) 0.4%
=========================== =========================== =========================
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
----------------- ------------------------ ----------------------
March 31, 2008 December 31, 2007 Percentage
Increase/ (Decrease)
----------------- ------------------------ ----------------------
Provisions for Lawsuit Settlements $5,073,932 $4,994,173 2%
Accounts Payable $2,111,638 $2,132,439 (1%)
Accrued Liabilities $322,167 $292,000 (10%)
Short-Term Loans $1,148,920 $1,200,973 (4%)
The increase in provision for lawsuits is due to accrued interest on outstanding
judgments. Accounts payable decreased due to a settlement of debt with stock and
payments of debt. Short-term loans decreased due to the conversion of $330,000
of notes to the Company's common stock. The decrease is offset by additional
short term loans of $123,500 in connection with our note financing to generate
cash. Short-term loans are net of discounts of $67,023 ($199,726) in 2007) and
warrant allocation of $24,406 ($53,501 in 2007) which nevertheless represents
actual cash obligations (Financial Statement Note 4).
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 may also be conditional upon
the forbearance of our creditors.
Included in short-term loans at March 31, 2008 are unsecured, non-interest
bearing advances of $138,600 that we anticipate will be converted into shares of
our common stock.
The holders of a total of $921,000 principal amount of convertible notes of the
Company have indicated that they will convert the principal and interest of such
notes into 102,921,108 common shares.
-26-
CASH FLOWS
-------------------------
At March 31,
-------------------------
2008 2007
---- ----
Net Cash provided by (used in) Operating Activities ($126,232) ($281,186)
Net Cash provided by (used in) Financing Activities $123,500 $356,000
Net Increase (Decrease) in Cash During Period ($2,732) $74,814
CASH USED IN OPERATING ACTIVITIES
The decrease in cash used in operating activities was due to the limited amount
of funds available compared to 2007.
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
2008 we need substantially more capital to complete development and continue our
business. There is no assurance that we will be able to raise the required
additional capital. 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. Accordingly, there is substantial doubt about
our ability to continue as a going concern.
We believe, however that recent technical developments provide the Company with
potential for substantial growth but this will require investment. We have the
following major goals, given appropriate funding:-
o To have products in the market place by the fourth quarter or before. We
are working on three market areas.
o To get operating income close to, or at breakeven by the first quarter of
2009 or before and positive for all of 2009.
There is no assurance that we will obtain sufficient funding or otherwise be
able to achieve our goals.
-27-
CRITICAL ACCOUNTING POLICIES
STOCK BASED COMPENSATION
Effective January 1, 2005 the Company adopted SFAS 123(R) using the modified
prospective approach and accordingly prior periods have not been restated to
reflect the impact of SFAS 123R. Under SFAS 123R, stock-based awards granted
prior to its adoption will be expensed over the remaining portion of their
vesting period. These awards will be expensed under the straight-line method
using the same fair value measurements which were used in calculating pro forma
stock-based compensation expense under SFAS 123. For stock-based awards granted
on or after January 1, 2005, the Company will amortize stock-based compensation
expense on a straight-line basis over the requisite service period, which is
generally a five-year vesting period.
SFAS 123(R) requires forfeitures to be estimated at the time of grant and
revised, if necessary, in subsequent periods if actual forfeitures differ from
initial estimates. Stock-based compensation expense was recorded net of
estimated forfeitures for the year ended December 31, 2005 such that expense was
recorded only for those stock-based awards that are expected to vest. Previously
under APB 25 to the extent awards were forfeited prior to vesting, the
corresponding previously recognized expense was reversed in the period of
forfeiture.
REVENUE RECOGNITION
Prior to the suspension of our operations in 2003, we recognized revenue upon
shipment of product. Since the re-commencement of operations, we recognize
license and royalty fees over the term of the license or royalty agreement.
During the year ended December 31, 2003, $400,000 in license fees were deferred
and amortized over 18 years. As a result, for the quarter ended March 31, 2008,
$5,556 ($5,556 in 2007) of licensing fees was recognized as income.
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.
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NEW ACCOUNTING PRONOUNCEMENTS
In September 2006, the FASB issued Statement No. 158, "Employer's Accounting for
Defined Benefit Pension and Other Postretirement Plans - an amendment of FASB
Statements No. 87, 88, 106, and 132(R)" ("SFAS 158"). This statement requires
the full recognition, as an asset or liability, of the overfunded or underfunded
status of a company-sponsored postretirement benefit plan. Adoption of this
statement is required effective for the Company's fiscal year ending December
31, 2007. The adoption of SFAS 158 has not had a material effect on the Company
as it has no defined benefit plans
In September 2006, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards 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. SFAS
157 was effective for the Company on January 1, 2008. The Company plans to adopt
the provisions of SFAS No. 157 on June 1, 2008 and is currently assessing the
impact of the adoption of SFAS No. 157 on its results of operations and
financial condition.
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 was
effective for the Company on January 1, 2008. The Company plans to adopt the
provisions SFAS No. 159 on June 1, 2008 and is currently assessing the impact of
the adoption of SFAS No. 159 on its results of operations and financial
condition..
In December 2007, the FASB issued SFAS No. 141R, "Business Combinations" ("SFAS
141R"). SFAS 141R revises the principles and requirements for how the acquirer
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, any non controlling interest in the acquiree,
and the goodwill acquired in a business combination or gain from a bargain
purchase. SFAS 141R also revises the principles and requirements for how the
acquirer determines what information to disclose to enable users of the
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financial statements to evaluate the nature and financial effects of the
business combination. This pronouncement will be effective for the Company on
January 1, 2009. The Company is currently evaluating the impact, if any, that
SFAS 141R will have on its financial position or results of operations.
Also in December 2007, the FASB issued SFAS No. 160, "Non controlling Interest
in Consolidated Financial Statements -- an amendment of ARB No. 51" ("SFAS
160"). SFAS 160 amends ARB No. 51 to establish accounting and reporting
standards for the non controlling interest in a subsidiary and for the
deconsolidation of a subsidiary. This pronouncement will be effective for the
Company on January 1, 2009. The Company is currently evaluating the impact, if
any, that SFAS 160 will have on its financial position or results of operations.
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative
Instruments and Hedging Activities" ("SFAS No. 161"). SFAS 161 requires
companies with derivative instruments to disclose information that should enable
financial-statement users to understand how and why a company uses derivative
instruments, how derivative instruments and related hedged items are accounted
for under FASB Statement No. 133 "Accounting for Derivative Instruments and
Hedging Activities" and how derivative instruments and related hedged items
affect a company's financial position, financial performance and cash flows.
SFAS 161 is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008. The Company is currently
evaluating the impact, if any, that SFAS 161 will have on its financial position
or results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
NOT APPLICABLE.
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ITEM 4. 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.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act Rule
13a-15(f). As required by Rule 13a-15 under the Exchange Act the Company's Chief
Executive Officer and its Chief Financial Officer assessed the effectiveness of
our internal control over financial reporting as of March 31, 2008. In making
its assessment of internal control over financial reporting, management used the
criteria described in Internal Control -- Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
Based on this assessment management identified material weaknesses in the
Company's internal controls over financial reporting due in a significant part
to the pervasive effect of the lack of resources, specifically the limited
number of personnel involved in the financial reporting including the number of
persons that are appropriately qualified in the areas of U.S. GAAP and SEC
reporting. These limitations include an inability to segregate functions.
Because of this weakness there is a possibility that a material misstatement of
the annual financial statements would not have been prevented or detected.
Nevertheless 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 of the
accuracy of the Company's financial statements at year end. The adverse effect
of the material weakness over internal controls, however, will become magnified
if the Company increases operations.
Due to the complexity of the accounting for the convertible notes with
detachable warrants, there were material additional adjustments made to our
annual financial statements prior to their publication in this report as well as
interim financial statements after filing. In management's view, this was not
the result of a material weakness in internal control but due to the complexity
of the accounting rules and their interpretations affecting transactions of this
nature.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no changes in our internal control over financial reporting that
occurred during our most recent fiscal quarter that have materially affected, or
are reasonably likely to materially affect, our internal control over financial
reporting.
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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 $200,000 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. Subsequent to year end the Company agreed to a nonmonetary
settlement permitting the plaintiff to retain a majority of its shares but
releasing the Company from all liability with any payments.
ITEM 2. CHANGES IN SECURITIES.
The following issuances of securities occurred during the three months ended
March 31, 2008.
During the three months ended March 31, 2008 we sold 1 unit of our securities in
a private placement. Each unit consisted of a $100,000, 18% convertible note and
warrants to purchase 2,000,000 of our shares at $0.025. The note is convertible
at any time prior to payment. The conversion price was two cents ($0.02). 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 $330,000 of principal of the aforesaid notes were converted
into 48,123,194 shares of our common stock. These latter shares were issued
pursuant to Section 3a (9) of the Securities Act of 1933 and are exempt from the
registration requirements under that act.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
EXHIBITS
EXHIBIT
NUMBER
DESCRIPTION OF EXHIBIT
31.1 Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
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In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has caused this registration statement to be signed on its behalf
by the undersigned, thereunto duly authorized.
TURBODYNE TECHNOLOGIES, INC.
Signature TITLE DATE
----- ----
/s/ Jason Meyers Co-Chief Executive Officer, May 21, 2008
________________________ Director
Jason Meyers
/s/ Debi Kokinos Chief Financial Officer May 21, 2008
_________________________ and Chief Accounting Officer
Debi Kokinos
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