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 JUNE 30, 2008
[ ] Transition Report pursuant to 13 or 15(d) of the Securities Exchange Act
of 1934
For the transition period __________ to __________
Commission File Number 000-21391
TURBODYNE TECHNOLOGIES, INC.
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(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) 512-9511
NOT APPLICABLE
--------------
(Former name, former address and former fiscal year end,
if changed since last report)
Check whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the issuer was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days Yes [ ] No [X]
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 [_] (do not check if a smaller reporting company)
Smaller reporting company [X]
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: 480,212,796 shares of common stock
issued and outstanding as of AUGUST 5, 2008.
Transitional Small Business Disclosure Format (check one): Yes [_] NO [X]
TURBODYNE TECHNOLOGIES, INC.
INDEX TO FORM 10-Q
JUNE 30, 2008
PAGE
NUMBER
------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets as of June 30, 2008 and
December 31, 2007 4
Consolidated Statements of Operations for the three and six
month periods ended June 30, 2008 and June 30, 2007 5
Consolidated Statements of Cash Flows for the six month
periods ended June 30, 2008 and June 30, 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 31
Item 4. Controls and Procedures 32
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 33
Item 1A. Risk Factors NA
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 33
Item 3. Defaults Upon Senior Securities NA
Item 4. Submission of Matters to a Vote of Security Holders NA
Item 5. Other Information NA
Item 6. Exhibits 33
SIGNATURES 34
2
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX-MONTH PERIODS ENDED
JUNE 30, 2008 AND 2007
(UNAUDITED - EXPRESSED IN US DOLLARS)
3
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(EXPRESSED IN US DOLLARS)
JUNE 30 DECEMBER 31
2008 2007
- --------------------------------------------------------------------------------------------------
ASSETS (UNAUDITED)
CURRENT
Cash $ 104,331 $ 2,786
Prepaid expenses and other current assets 672 672
------------------------------
TOTAL CURRENT ASSETS 105,003 3,458
PROPERTY AND EQUIPMENT, net 7,733 9,513
------------------------------
TOTAL ASSETS $ 112,736 $ 12,971
==================================================================================================
LIABILITIES AND STOCKHOLDERS' DEFICIT
LIABILITIES
CURRENT
Accounts payable $ 2,222,052 $ 2,132,439
Accrued liabilities 335,092 292,000
Provision for lawsuit settlements (Note 5) 5,169,643 4,994,173
Loans payable (Note 4) 1,100,274 1,200,973
------------------------------
TOTAL CURRENT LIABILITIES 8,827,061 8,619,585
DEFERRED LICENSING FEE 285,942 297,054
------------------------------
TOTAL LIABILITIES 9,113,003 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 in 2008 and 2007 12 12
469,573,046 common shares in 2008 (380,459,434 in 2007) 469,573 380,460
Treasury stock, at cost (5,278,580 shares) (1,963,612) (1,963,612)
Additional paid-in capital 127,000,280 124,831,388
Other comprehensive income -
Foreign exchange translation gain 35,119 35,119
Accumulated deficit (134,541,639) (132,187,035)
------------------------------
TOTAL STOCKHOLDERS' DEFICIT (9,000,267) (8,903,668)
------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 112,736 $ 12,971
==================================================================================================
The accompanying notes are an integral part of these unaudited
consolidated financial statements.
4
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited - Expressed in US Dollars)
THREE-MONTH SIX-MONTH
PERIODS ENDED PERIODS ENDED
JUNE 30 JUNE 30
2008 2007 2008 2007
- --------------------------------------------------------------------------------------------------------------
REVENUE (Restated) (Restated)
Licensing fees
$ 5,556 $ 5,556 $ 11,112 $ 11,112
----------------------------------------------------------------
TOTAL REVENUE 5,556 5,556 11,112 11,112
----------------------------------------------------------------
EXPENSES
General and administrative 174,508 249,159 430,356 484,199
Research and development 92,362 144,735 202,920 225,676
Litigation expense 98,330 79,765 180,395 159,524
Depreciation and amortization 890 -- 1,780 537
----------------------------------------------------------------
TOTAL EXPENSES 366,090 473,659 815,451 869,936
----------------------------------------------------------------
LOSS FROM OPERATIONS (360,534) (468,103) (804,339) (858,824)
OTHER INCOME (EXPENSES)
Interest expense (35,602) (12,323) (57,632) (21,313)
Amortization of discount on
convertible notes (94,382) (189,574) (334,576) (345,476)
Debt conversion expense (729,600) (256,000) (1,156,457) (678,400)
Gain on extinguishment of debt -- 109,721 -- 231,771
----------------------------------------------------------------
LOSS BEFORE TAXES (1,220,118) (816,279) (2,353,004) (1,672,242)
INCOME TAX EXPENSE -- -- (1,600) --
----------------------------------------------------------------
NET LOSS FOR THE PERIOD $ (1,220,118) $ (816,279) $ (2,354,604) $ (1,672,242)
================================================================
Loss per common share
BASIC AND DILUTED $ (0.00) $ (0.00) $ (0.01) $ (0.00)
==============================================================================================================
WEIGHTED AVERAGE SHARES - BASIC AND DILUTED 439,581,259 360,833,061 417,896,030 355,084,533
==============================================================================================================
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 SIX-MONTH PERIODS ENDED JUNE 30 2008 2007
- ---------------------------------------------------------------------------------------------
(Restated)
- ---------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net loss for the period $(2,354,604) $(1,672,242)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Amortization of deferred licensing fees (11,112) (11,112)
Depreciation and amortization 1,780 537
Gain on extinguishment of debt -- (231,771)
Amortization of discount on convertible debt (Note 4) 334,576 345,476
Stock for services 189,444 --
Debt conversion expense (Note 4) 1,156,457 678,400
Warrant compensation (Note 3) 95,584 199,203
(Increase) decrease in operating assets
Prepaid expenses and other current assets -- --
Increase (decrease) in operating liabilities
Accounts payable 89,613 90,649
Accrued liabilities and provision for lawsuit settlements 276,307 138,880
----------- -----------
Net cash used in operating activities (221,955) (461,980)
----------- -----------
FINANCING ACTIVITIES
Convertible Notes Payable 323,500 425,000
Notes Payable -- 31,000
----------- -----------
Net cash provided by financing activities 323,500 456,000
----------- -----------
NET INCREASE (DECREASE) IN CASH 101,545 (5,980)
CASH, beginning of period 2,786 14,745
----------- -----------
CASH, end of period $ 104,331 $ 8,765
=============================================================================================
SUPPLEMENTARY DISCLOSURE OF NON-CASH INFORMATION
BENEFICIAL CONVERSION FEATURE OF CONVERTIBLE DEBT $ 122,250 $ 318,941
VALUE OF WARRANTS ISSUED WITH CONVERTIBLE DEBT 72,250 106,059
CONVERSION OF INTEREST AND NOTES PAYABLE TO COMMON STOCK 622,020 100,000
=============================================================================================
The accompanying notes are an integral part of these unaudited
consolidated financial statements.
6
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited - Expressed in US Dollars)
JUNE 30, 2008 AND 2007
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 $134,541,639 and a total capital deficit of $9,000,267 at June
30, 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.
7
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED - EXPRESSED IN US DOLLARS)
JUNE 30, 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:
Computers & Peripherals - 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 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 June 30, 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.
8
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED - EXPRESSED IN US DOLLARS)
JUNE 30, 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
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED - EXPRESSED IN US DOLLARS)
JUNE 30, 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 June 30, 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 FASB issued Statement No. 157, "Fair Value
Measurements" ("SFAS 157"). SFAS No. 157 provides accounting guidance on
the definition of fair value, establishes a framework for measuring fair
value and requires expanded disclosures about fair value measurements.
SFAS 157 is effective for the Company starting January 1, 2008 and did not
have an impact on the Company as the Company does not have financial
instruments subject to the expanded disclosure requirements of SFAS 157.
In February 2008, the FASB issued FASB Staff Position FAS 157-2,
"Effective Date of FASB Statement No. 157", which provides a one year
delay of the effective date of SFAS 157 as it relates to nonfinancial
assets and liabilities, except those that are recognized or disclosed at
fair value in the financial statements on a recurring basis (at least
annually). The provisions of SFAS 157 relating to nonfinancial assets and
liabilities will be effective as of the beginning of the Company's 2009
fiscal year.
Effective January 1, 2008, the Company adopted Statement No. 159, "The
Fair Value Option for Financial Assets and Financial Liabilities -
Including an Amendment of FASB Statement No. 115 ("SFAS 159")." SFAS 159
permits entities to choose to measure many financial instruments and
certain other items at fair value, and establishes presentation and
disclosure requirements designed to facilitate comparisons between
entities that choose different measurement attributes for similar types of
assets and liabilities. The adoption of SFAS 159 had no impact on the
Company's financial statements as the Company did not elect the fair value
option.
10
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED - EXPRESSED IN US DOLLARS)
JUNE 30, 2008 AND 2007
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
CONTINUED
NEW ACCOUNTING PRONOUNCEMENTS - CONTINUED
In December 2007, the FASB issued Statement 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 Statement 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 Statement No. 161, "Disclosures about
Derivative Instruments and Hedging Activities" ("SFAS 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 our financial
position or results of operations.
In May 2008, the FASB issued Statement No. 162, "The Hierarchy of
Generally Accepted Accounting Principles ("SFAS 162"). SFAS 162 identifies
a consistent framework, or hierarchy, for selecting accounting principles
to be used in preparing financial statements that are presented in
conformity with U.S. generally accepted accounting principles for
nongovernmental entities (the "Hierarchy"). The Hierarchy within SFAS 162
is consistent with that previously defined in the AICPA Statement on
Auditing Standards No. 69, "The Meaning of Present Fairly in Conformity
With Generally Accepted Accounting Principles" ("SAS 69"). SFAS 162 is
effective 60 days following the United States Securities and Exchange
Commission's (the "SEC") approval of the Public Company Accounting
Oversight Board amendments to AU Section 411, "The Meaning of Present
Fairly in Conformity With Generally Accepted Accounting Principles". The
adoption of SFAS 162 will not have a material effect on the Consolidated
Financial Statements because the Company has utilized the guidance within
SAS 69.
11
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED - EXPRESSED IN US DOLLARS)
JUNE 30, 2008 AND 2007
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
CONTINUED
NEW ACCOUNTING PRONOUNCEMENTS - CONTINUED
In May 2008, the FASB issued Statement No. 163, "Accounting for Financial
Guarantee Insurance Contracts--an interpretation of FASB Statement No. 60
("SFAS No. 163"). SFAS 163 requires recognition of an insurance claim
liability prior to an event of default when there is evidence that credit
deterioration has occurred in an insured financial obligation. SFAS 163 is
effective for financial statements issued for fiscal years beginning after
December 15, 2008, and all interim periods within those fiscal years.
Early application is not permitted. The Company's adoption of SFAS 163
will not have a material effect on the Consolidated Financial Statements.
2 RESTATEMENT OF 2007 FINANCIAL STATEMENTS
The Company is restating its previously issued June 30, 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 Increase
Reported (Decrease)
(Original) Restated
TOTAL ASSETS $ 9,437 $ -- $ 9,437
Loans payable 690,548 (7,689) 682,859
Total Current Liabilities 8,088,741 (7,689) 8,081,052
TOTAL LIABILITIES 8,396,907 (7,689) 8,389,218
Additional paid in capital 123,258,888 662,178 123,921,066
Accumulated deficit (130,083,194) (654,489) (130,737,683)
TOTAL CAPITAL DEFICIT (8,387,470) 7,689 (8,379,781)
STATEMENT OF OPERATIONS
Amortization of convertible notes
discount relating to -
Beneficial conversion feature* (101,341) (215,166) (316,507)
Warrants (85,773) 56,804 (28,969)
Debt conversion expense (422,400) (256,000) (678,400)
NET LOSS $ (1,257,880) $ (414,362) $ (1,672,242)
12
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED - EXPRESSED IN US DOLLARS)
JUNE 30, 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 June 30, 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 six months ended June 30, 2008 the Company issued
89,113,612 shares of common stock, 83,113,612 for conversion of
notes and interest payable and 6,000,000 for payment of services.
During the six months ended June 30, 2007, the Company issued
20,000,000 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 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.
13
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED - EXPRESSED IN US DOLLARS)
JUNE 30, 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, 22,044,436 were
cancelled due to termination of the consulting contracts and
3,894,443 were vested and reflected as an expense for the six months
ended June 30, 2008. The total number of warrants vested from the
grant date through June 30, 2008 is 20,066,663, leaving 36,088,901
not vested.
During the six months ended June 30, 2008 the Company recorded
$95,584 ($199,203 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 vested to non-employees during
the six months ended June 30, 2008 ranged from $0.017 to $0.0352.
Assumptions used to value the warrants: expected dividend yield
Nil%; expected volatility of 101.36% and 157.41%; risk-free interest
ranged from 2.88% to 3.68% and an expected life of 7 years.
d) Stock Purchase Warrants
At June 30, 2008 the Company had 41,186,663 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 $0.017 per
share and expiration dates between 2011 and 2015. Details of share
purchase warrants for the quarter ended June 30, 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 of
period 15,120,000 0.02 16,172,220 $ 0.01 31,292,220 $ 0.02
Granted 6,000,000 0.02 3,894,443 $ 0.01 9,894,443 $ 0.02
---------- ---------- ----------
Warrants outstanding and
exercisable at end of
period 21,120,000 0.02 20,066,663 $ 0.01 41,186,663 $ 0.02
========== ========== ==========
Weighted average fair value
of warrants granted during
the period 0.02 $ 0.01 $ 0.01
============================================================================
14
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED - EXPRESSED IN US DOLLARS)
JUNE 30, 2008 AND 2007
3. SHARE CAPITAL - CONTINUED
At June 30, 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 19,233,335 5.92 $0.01
$0.025 - 0.04 21,953,328 4.21 0.02
-------------------------------------
41,186,663 5.00 $0.02
=====================================
4. LOANS PAYABLE
June 30, 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 49,754 46,000
Note payable, 18% per annum 60,937 33,300
Convertible notes payable net of unamortized discount of $68,756
and $199,726 and warrant valuation of $44,398 and $53,501 in 2008
and 2007, respectively** 850,983 983,073
-------------------------
Total Loans Payable $1,100,274 $1,200,973
=========================
** During the quarter ended June 30, 2008, the Company issued $200,000
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.
15
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED - EXPRESSED IN US DOLLARS)
JUNE 30, 2008 AND 2007
4. LOANS PAYABLE - CONTINUED
As of June 30, 2008, convertible notes consist of:
Issued Issued Issued Issued Issued Issued
through from from from From From
Sept Nov 06 to Mar07 to Sep 07 to Jan 08 to Apr 08 to
2006 Feb 07 Aug 07 Dec 07 Mar 08 Jun 08 Total
--------------------------------------------------------------------------------------------------
Proceeds from issuances of
convertible debt $ 615,000 $ 95,000 $ 441,000 $ 200,000 $ 100,000 $ 200,000 $ 1,651,000
Less: Debt conversions (500,000) (10,000) (260,000) -- -- -- (770,000)
--------------------------------------------------------------------------------------------------
115,000 85,000 181,000 200,000 100,000 200,000 881,000
--------------------------------------------------------------------------------------------------
Discount on convertible debt
Value allocated to warrants 88,144 8,041 118,485 51,035 24,198 48,052 337,955
Beneficial conversion feature 521,756 86,959 322,515 148,965 54,198 68,052 1,202,445
--------------------------------------------------------------------------------------------------
609,900 95,000 441,000 200,000 78,396 116,104 1,540,400
Accumulated amortization of
value allocated to warrants (88,144) (8,041) (118,341) (51,035) (17,550) (10,446) (293,557)
Accumulated amortization of
beneficial conversion feature (521,541) (86,959) (322,122) (148,965) (39,308) (14,794) (1,133,689)
--------------------------------------------------------------------------------------------------
215 -- 537 -- 21,538 90,864 113,154
--------------------------------------------------------------------------------------------------
Accrued Interest 23,788 6,187 15,362 27,300 6,600 3,900 83,137
--------------------------------------------------------------------------------------------------
Net Convertible Debt $ 138,573 $ 91,187 $ 195,825 $ 227,300 $ 85,062 $ 113,036 $ 850,983
==================================================================================================
Lower
of 70%
of market
Original conversion price or $0.025 $ 0.005 $ 0.020 $ 0.020 $ 0.020 $ 0.020 --
Modified conversion price $ 0.005 N/A N/A N/A N/A N/A --
Interest rate 5% 5% 5% 18% 18% 18% --
Maturity from date of issuance 1 year 1 year 1 year 6 months 6 months 6 months --
Warrants issued 12,300,000 1,900,000 8,820,000 4,000,000 2,000,000 4,000,000 33,020,000
Warrants exercised (11,900,000) -- -- -- -- -- (11,900,000)
--------------------------------------------------------------------------------------------------
Warrants remaining 400,000 1,900,000 8,820,000 6,000,000 2,000,000 4,000,000 21,120,000
--------------------------------------------------------------------------------------------------
Market value of warrants at
date of issuance $ 50,884 $ 48,863 $ 398,872 $ 140,612 $ 41,498 $ 67,630
Assumptions for Black-Scholes
valuation of warrants
Original exercise price $ 0.025 $ 0.025 $ 0.020 $ 0.020 $ 0.020 $ 0.020
Modified exercise price $ 0.010 N/A N/A N/A N/A N/A
Term 5 years 5 years 5 years 5 years 5 years 5 years
146%- 153%- 112%- 112%-
Volatility rate 151% 155% 155% 155% 109% 107%
4.61%- 4.45%- 4.46%- 2.93%-
Risk free interest rate 5.02% 4.69% 5.01% 5.01% 2.93% 1.90%
16
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED - EXPRESSED IN US DOLLARS)
JUNE 30, 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 six
months ended June 30, 2008 the Company issued $300,000 of convertible
notes. All of the convertible notes were issued with detachable warrants
to purchase 13,820,000, 13,200,000 and 6,000,000 shares of the Company's
common stock, respectively, at $0.0250 per share. For the six months ended
June 30, 2008 the Company allocated the $300,000 according to the value of
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 six months ended
June 30, 2008 the amortization of the discount was $334,576.
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 six months ending June 30, 2008 the Company recognized an expense
of $1,156,457.
Prior to the six months ended June 30, 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 from the original issuance of the convertible notes was written
off and included in total amortization for 2006. At date of original
issuance, the debt discount resulting from beneficial conversion feature
amounting to $339,980 has been completely replaced with the new beneficial
conversion feature arising from the modification of conversion terms.
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 $0.02 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 June 30, 2008, the remaining balance of the
beneficial conversion feature was $68,756 and detachable warrants were
$44,398.
17
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED - EXPRESSED IN US DOLLARS)
JUNE 30, 2008 AND 2006
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 5(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. TST agreed to
the immediate entry of judgment against the Company in the amount of
$2,068,078 plus interest from the date of entry at the rate of 10%
per annum. The amount of this judgment would immediately increase by
any amount that TST is compelled by judgment or court order or
settlement to return as a preferential transfer in connection with
the bankruptcy proceedings of Pacific Baja; and TST cannot execute
on its judgment until Turbodyne either: (a) files a voluntary
bankruptcy case; (b) is the subject of an involuntary case; or (c)
effects an assignment for the benefit of creditors.
Any proceeds received by TST or its president from the sale of the
issued shares will be automatically applied as a credit against the
amount of the judgment against the Company in favor of TST. Prior to
March 31, 2004, 147,000 shares issued in connection with the TST
settlement had been sold which have reduced the provision for
lawsuit settlement by $23,345.
At June 30, 2008, the Company has included $3,767,858 ($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.
June 30, 2008 December 31, 2007
---------------------------------
Settlement amount $ 2,068,079 $ 2,068,079
Interest 1,640,124 1,464,653
Preference payment 83,000 83,000
Proceeds of stock sale (23,345) (23,345)
---------------------------------
Total $ 3,767,858 $ 3,592,387
=================================
18
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED - EXPRESSED IN US DOLLARS)
JUNE 30, 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 Director
A former director of Turbodyne, Erwin Kramer (the "Plaintiff"),
represented by his attorney Claus Schmidt, a former attorney of
Turbodyne at the time of the alleged claim, filed a legal action in
Germany against Turbodyne, our non-operating subsidiary Turbodyne
Europe GmbH ("Turbodyne GmbH"), and ex-employees of Turbodyne GmbH,
Peter Kitzinski and Marcus Kumbrick (collectively the "Defendants"),
with the Regional Frankfurt court (the "German Court") in September,
2004. The Plaintiff claims damages of Euro 245,620 plus 5% interest
per annum against the Defendants in respect of actions taken by the
Defendants while employed with Turbodyne GmbH.
On September 9, 2004, the German Court, on a motion by the
Defendants to the suit, dismissed the Plaintiff's claims against
Peter Kitzinski and Marcus Kumbrick, and ordered that Turbodyne's
patents in Munich be attached pending the resolution of the
Plaintiff's claim against Turbodyne and Turbodyne GmbH. On June 13,
2005 the Court in Frankfurt dismissed the claim. The Plaintiff filed
an appeal against this judgment with the Higher Regional Court in
Frankfurt.
The Plaintiff's attorney, Claus Schmidt, also filed similar suits on
behalf of Frank Walter and Herbert Taeuber. The German courts are
indicating that all three suits need to be filed in the United
States not Germany. Presently the suits have not been filed in the
United States. We vigorously dispute this claim and have retained
German counsel to defend it and seek its dismissal. At June 30,
2008, the Company has included $405,785 in regard to this matter in
the provision for lawsuit settlements.
19
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED - EXPRESSED IN US DOLLARS)
JUNE 30, 2008 AND 2006
5. COMMITMENTS AND CONTINGENCIES - CONTINUED
d) Crescent Fund, LLC
A former consultant brought an action against the Company in the
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 sought $300,000 damages based upon claims for
alleged breaches of contract and covenants of good faith and fair
dealing allegedly arising because the Company failed to give
plaintiff an opinion to sell the 5,000,000 shares of the Company's
common stock received for services. The Company in the action sought
the return of such shares and damages based upon plaintiff's breach
and fraud based upon the failure to perform any of the duties and
obligations required of it under the aforesaid contract which was
fraudulently induced. The Company did not anticipate any liability
and therefore did not include an amount in the provision for lawsuit
settlements. The action has been settled pursuant to which the
plaintiff retained a majority of the shares and released the Company
from all liability with any payments.
e) Other
The Company is currently involved in various collection claims and
other legal actions. It is not possible at this time to predict the
outcome of the legal actions.
6. SUBSEQUENT EVENTS
Subsequent to June 30, 2008 the Company issued 13,939,740 shares of the
Company's common stock to comply with the anti dilution clause of the
Agreement and Plan of Merger (the "Agreement") dated September 1, 2005.
The Agreement among the Company. Turbodyne Acquisition Corp. a wholly
owned subsidiary of Parent and Aspatuck Holdings Nevada Inc. provides that
"it is the intent of the parties that the Merger Consideration Shares
shall constitute 40% of the post merger fully diluted shares outstanding
taking into account the issuance of shares of Parent Common Stock in
settlement of the Pacific Baja Litigation and other shares relating in any
manner to events or transactions prior to the Effective Date." A
significant portion of the proceeds of the Company's private placements
were used to settle prior obligations of the Company. Based on
calculations presented to the board and the terms of the aforesaid
Agreement the issuance of aforesaid shares was authorized.
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 it took office in September 2005, management has obtained some additional
financing and has conducted limited business activity including:
o Updating our financial statements and required SEC filings
o Assessment of our technology including patents and other rights
o Limited development of our Turbopac(TM) and related product line
o Filing for protection of new intellectual properties related to our products
o Review and negotiate to settle outstanding litigation and liabilities
o Formulating business and marketing plans
There is no assurance we will be able to obtain sufficient financing to
implement full scale operations.
21
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.
During the quarter ended June 30, 2008 the Company received an order from
American Transportation Systems of Los Angeles, Ca. for the installation and
testing of its patented TurboPac. The Company will perform a pilot phase to
prove diesel fuel savings and emissions reduction. If the initial pilot phase
shows certain improvements in emissions and fuel consumption American
Transportation Systems will then purchase a series of TurboPacs that will lead
to a retrofit of a select number of vehicles in their fleet of coach
transportation and school buses.
22
RESULTS OF OPERATIONS
--------------------------------------------- ---------------------------------------------
Three Months Ended June 30 Six Months Ended June 30
--------------------------------------------- ---------------------------------------------
Percentage Percentage
2008 2007 Increase 2008 2007 Increase
(Decrease) (Decrease)
------------ ------------- ------------ ------------ ------------- -----------
Total Revenue $5,556 $5,556 Nil $11,112 $11,112 Nil
Operating Expenses ($366,090) ($473,659) (23%) ($815,451) ($869,936) (6%)
----------- ------------ ------------ -------------
Net Loss from
Operations ($360,534) ($468,103) (23%) ($804,339) ($858,824) (6%)
Other Income
(Expenses) ($859,584) ($348,176) 147% ($1,550,265) ($813,418) 91%
----------- ------------ ------------ -------------
Net (Loss) ($1,220,118) ($816,279) 49% ($2,354,604) ($1,672,242) 41%
============ ============= ============ =============
NET REVENUE
--------------------------------------------- ---------------------------------------------
Three Months Ended June 30 Six Months Ended June 30
--------------------------------------------- ---------------------------------------------
Percentage Percentage
2008 2007 Increase 2008 2007 Increase
------------ ------------- ------------ ------------ ------------- -----------
License Fee $5,556 $5,556 Nil $11,112 $11,112 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 the three and six month periods
ended June 30, 2008 and 2007, $5,556 and $11,112 of licensing fees was
recognized as income, respectively. Our continued net losses from operations
reflect our continued operating expenses and our inability to generate revenues.
We believe that we will not be able to generate any significant revenues from
TurboPac(TM)/TurboFlow(TM) until we complete our production models and enter
into commercial arrangements. See discussion above.
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:
----------------------------------- -----------------------------------
Three Months Ended June 30 Six Months Ended June 30
----------------------------------- -----------------------------------
Percentage Percentage
Increase Increase
2008 2007 (Decrease) 2008 2007 (Decrease)
----------------------------------- -----------------------------------
General and Administrative
Expenses $174,508 $249,159 (30%) $430,356 $484,199 (11%)
Research and Development
Expenses $92,362 $144,735 (36%) $202,920 $225,676 (10%)
Litigation Expenses $98,330 $79,765 23% $180, 395 $159,524 13%
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative costs included management compensation and overhead
and for the three and six months ended June 30, 2008 included non cash stock
compensation expense of $9,444 and $18,111 (Nil in 2007) and non cash warrant
expense amount of $31,206 and $66,387 ($71,387 and $159,244 in 2007). (Financial
Statement Note 3) The decrease in costs in 2008 is due to decreased spending for
consulting fees and a corresponding decrease in the non cash warrant expense
RESEARCH AND DEVELOPMENT
The decrease in research and development costs in 2008 is due to decreased
spending for consulting fees and a corresponding decrease in the non cash
warrant expense amount to $29,197. For the six months ended June 30, 2007 the
non cash warrant expense was $39,959. 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. The warrants are not expensed until
vested. The expense is allocated to selling general and administrative or
research and development as appropriate.
24
Of these warrants, 22,044,436 were cancelled due to termination of the
consulting contracts and 3,894,443 were vested and reflected as an expense for
the six months ended June 30, 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 and expensed as of June 30, 2008 was 20,066,663
warrants. As a result, we recognized $60,403 of non-employee compensation
expense during the quarter ended June 30, 2008 compared to $111,796 during the
quarter ended June 30, 2007. From time to time we may grant a significant number
of options or warrants to purchase common stock to non-employees.
In January 2008 the Company entered a consulting agreement to issue 12,000,000
shares of the Company's common stock as compensation. The shares vest in
accordance with a vesting schedule. Of these shares 666,666 have vested as of
June 30, 2008. As a result we recognized non cash stock compensation expense of
$9,444 and $18,111 (Nil in 2007) for the three and six months ended June 30,
2008.
OTHER INCOME (EXPENSE)
Three Months Ended June 30 Six Months Ended June 30
------------------------------------ ---------------------------------------
Percentage Percentage
Increase Increase
2008 2007 (Decrease) 2008 2007 (Decrease)
------------------------------------ ---------------------------------------
Gain on Extinguishment
of debt -- $109,721 (100%) -- $231,771 (100%)
---------------------- -------------------------
OTHER EXPENSES
Interest Expense ($35,602) ($12,323) 189% ($57,632) ($21,313) 170%
Amortization of Discount
on Convertible Notes ($94,382) ($189,574) (50%) ($334,576) ($345,476) (3%)
Inducement Expense ($729,600) (256,000) 185% ($1,156,457) ($678,400) 70%
Income Tax Expense -- -- -- ($1,600) -- 100%
---------------------------------------------------------------------------------
Total Other Expenses ($859,584) ($457,897) 88% ($1,550,265) ($1,045,189) 48%
---------------------------------------------------------------------------------
Other Income and Expenses ($859,584) ($348,176) 147% ($1,550,265) ($813,418) 91%
=================================================================================
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 ended June 30, 2008 of $859,584
compared to $457,897 in 2007. As indicated above, these expenses consisted
mainly of amortization of discounts on convertible notes and value of detachable
warrants and for related debt conversion expenses (Financial Statement Note 7).
25
NET INCOME / LOSS
Our net loss for the quarter ended June 30 2008 increased to $1,220,118 from net
loss of $816,279 for the quarter ended June 30, 2007, representing an increase
of 49%. 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 decreased by
$107,569 or 23%.
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.
26
FINANCIAL CONDITION
CASH AND WORKING CAPITAL
-----------------------------------------------
June 30, 2008 December 31, 2007 Percentage
Increase
-----------------------------------------------
Current Assets $105,003 $3,458 2,936%
Current Liabilities ($8,827,061) ($8,619,585) 2%
-----------------------------------------------
Working Capital Deficit ($8,722,058) ($8,616,127) 1%
===============================================
The increase to our working capital deficit was primarily attributable to an
increase in accounts payable, convertible notes and provision for lawsuit
settlements as discussed below.
LIABILITIES
--------------------------------------------------------
June 30, 2008 December 31, 2007 Percentage
Increase/ (Decrease)
--------------------------------------------------------
Provisions for Lawsuit Settlements $5,169,643 $4,994,173 4%
Accounts Payable $2,222,052 $2,132,439 4%
Accrued Liabilities $335,092 $292,000 15%
Short-Term Loans $1,100,274 $1,200,973 (8%)
The increase in provision for lawsuits is primarily due to accrued interest on
outstanding judgments. Short-term loans decreased due to the conversion of
$599,494 of notes and accrued interest to the Company's common stock. The
decrease is offset by additional short term loans of $323,500 in connection with
our note financing to generate cash. Short-term loans are net of discounts of
$68,756 ($199,726 in 2007) and warrant allocation of $44,398 ($53,501 in 2007)
which nevertheless represents actual cash obligations (Financial Statement Note
4).
Included in short-term loans at June 30, 2008 are unsecured, non-interest
bearing advances of $138,600 that we anticipate will be converted into shares of
our common stock.
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CASH FLOWS
---------------------
At June 30,
---------------------
2008 2007
---- ----
Net Cash provided by (used in) Operating Activities ($221,955) ($461,980)
Net Cash provided by (used in) Financing Activities $323,500 $456,000
Net Increase (Decrease) in Cash During Period $101,545 ($5,980)
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. Our major
goals, given appropriate funding are discussed above.
There is no assurance that we will obtain sufficient funding or otherwise be
able to achieve our goals.
28
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 six months ended June 30,
2008, $11,112 ($11,112 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.
29
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 FASB issued Statement No. 157, "Fair Value Measurements"
("SFAS 157"). SFAS No. 157 provides accounting guidance on the definition of
fair value and establishes a framework for measuring fair value and requires
expanded disclosures about fair value measurements. SFAS 157 is effective for
the Company starting January 1, 2008 and did not have an impact on the Company
as the Company does not have financial instruments subject to the expanded
disclosure requirements of SFAS 157. In February 2008, the FASB issued FASB
Staff Position FAS 157-2, "Effective Date of FASB Statement No. 157", which
provides a one year delay of the effective date of SFAS 157 as it relates to
nonfinancial assets and liabilities, except those that are recognized or
disclosed at fair value in the financial statements on a recurring basis (at
least annually). The provisions of SFAS 157 relating to nonfinancial assets and
liabilities will be effective as of the beginning of the Company's 2009 fiscal
year.
Effective January 1, 2008, the Company adopted Statement No. 159, "The Fair
Value Option for Financial Assets and Financial Liabilities - Including an
Amendment of FASB Statement No. 115 ("SFAS 159")." SFAS 159 permits entities to
choose to measure many financial instruments and certain other items at fair
value, and establishes presentation and disclosure requirements designed to
facilitate comparisons between entities that choose different measurement
attributes for similar types of assets and liabilities. The adoption of SFAS 159
had no impact on the Company's financial statements as the Company did not elect
the fair value option
In December 2007, the FASB issued Statement 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 Statement 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.
30
In March 2008, the FASB issued Statement No. 161, "Disclosures about Derivative
Instruments and Hedging Activities" ("SFAS 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 our financial position
or results of operations.
In May 2008, the FASB issued Statement No. 162, "The Hierarchy of Generally
Accepted Accounting Principles ("SFAS 162"). SFAS 162 identifies a consistent
framework, or hierarchy, for selecting accounting principles to be used in
preparing financial statements that are presented in conformity with U.S.
generally accepted accounting principles for nongovernmental entities (the
"Hierarchy"). The Hierarchy within SFAS 162 is consistent with that previously
defined in the AICPA Statement on Auditing Standards No. 69, "The Meaning of
Present Fairly in Conformity With Generally Accepted Accounting Principles"
("SAS 69"). SFAS 162 is effective 60 days following the United States Securities
and Exchange Commission's (the "SEC") approval of the Public Company Accounting
Oversight Board amendments to AU Section 411, "The Meaning of Present Fairly in
Conformity With Generally Accepted Accounting Principles". The adoption of SFAS
162 will not have a material effect on the Consolidated Financial Statements
because the Company has utilized the guidance within SAS 69.
In May 2008, the FASB issued Statement No. 163, "Accounting for Financial
Guarantee Insurance Contracts--an interpretation of FASB Statement No. 60 ("SFAS
No. 163"). SFAS 163 requires recognition of an insurance claim liability prior
to an event of default when there is evidence that credit deterioration has
occurred in an insured financial obligation. SFAS 163 is effective for financial
statements issued for fiscal years beginning after December 15, 2008, and all
interim periods within those fiscal years. Early application is not permitted.
The Company's adoption of SFAS 163 will not have a material effect on the
Consolidated Financial Statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
NOT APPLICABLE.
31
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 June 30, 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.
32
PART II - OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
A former consultant brought an action against us in the 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 sought $300,000 damages
based upon claims for alleged breaches of contract and covenants of good faith
and fair dealing allegedly arising because we failed to give plaintiff an
opinion to sell the 5,000,000 shares of our common stock received for services.
The Company in the action sought the return of such shares and damages based
upon plaintiff's breach and fraud based upon the failure to perform any of the
duties and obligations required of it under the aforesaid contract which was
fraudulently induced. The Company did not anticipate any liability and therefore
did not include an amount in the provision for lawsuit settlements. The action
has been settled pursuant to which the plaintiff retained a majority of the
shares and released the Company from all liability with any payments.
ITEM 2. CHANGES IN SECURITIES.
The following issuances of securities occurred during the three months ended
June 30, 2008.
During the three months ended June 30, 2008 we sold 2 units 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 $0.025. The note is convertible
at any time prior to payment. The conversion price was one-half penny ($.005).
The securities were issued pursuant to Section 4(2) of the Securities Act of
1933 and are exempt from the registration requirements under that act. In
addition during such quarter $240,000 of principal of the aforesaid notes were
converted into 34,990,418 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.
33
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, August 14, 2008
- --------------------- Director
Jason Meyers
/s/ Debi Kokinos Chief Financial Officer August 14, 2008
- --------------------- and Chief Accounting Officer
Debi Kokinos
34