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 SEPTEMBER 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.
- --------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
NEVADA 95-4699061
- ------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
36 E. BARNETT STREET, VENTURA, CALIFORNIA 93001
- ----------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (805) 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 Smaller reporting company [X]
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: 550,507,401 shares of common stock
issued and outstanding as of NOVEMBER 12, 2008.
Transitional Small Business Disclosure Format (check one): Yes [ ] NO [X]
TURBODYNE TECHNOLOGIES, INC.
INDEX TO FORM 10-Q
SEPTEMBER 30, 2008
PAGE
NUMBER
------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets as of September 30, 2008
and December 31, 2007 4
Consolidated Statements of Operations for the three
and nine month periods ended September 30, 2008
and September 30, 2007 5
Consolidated Statements of Cash Flows for the nine
month periods ended September 30, 2008 and
September 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 NINE-MONTH PERIODS ENDED
SEPTEMBER 30, 2008 AND 2007
(UNAUDITED - EXPRESSED IN US DOLLARS)
3
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(EXPRESSED IN US DOLLARS)
SEPTEMBER 30 DECEMBER 31
2008 2007
- --------------------------------------------------------------------------------------------------
ASSETS (UNAUDITED)
CURRENT
Cash $ 13,054 $ 2,786
Prepaid expenses and other current assets 672 672
------------------------------
TOTAL CURRENT ASSETS 13,726 3,458
PROPERTY AND EQUIPMENT, net 21,168 9,513
------------------------------
TOTAL ASSETS $ 34,894 $ 12,971
==================================================================================================
LIABILITIES AND STOCKHOLDERS' DEFICIT
LIABILITIES
CURRENT
Accounts payable $ 2,339,512 $ 2,132,439
Accrued liabilities 353,267 292,000
Provision for lawsuit settlements (Note 5) 5,257,378 4,994,173
Loans payable (Note 4) 464,777 1,200,973
------------------------------
TOTAL CURRENT LIABILITIES 8,414,934 8,619,585
DEFERRED LICENSING FEE 280,386 297,054
------------------------------
TOTAL LIABILITIES 8,695,320 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
542,513,491 common shares in 2008 (380,459,434 in 2007) 542,514 380,460
Treasury stock, at cost (5,278,580 shares) (1,963,612) (1,963,612)
Additional paid-in capital 127,774,077 124,831,388
Other comprehensive income -
Foreign exchange translation gain 35,119 35,119
Accumulated deficit (135,048,536) (132,187,035)
------------------------------
TOTAL STOCKHOLDERS' DEFICIT (8,660,426) (8,903,668)
------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 34,894 $ 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 NINE-MONTH
PERIODS ENDED PERIODS ENDED
SEPTEMBER 30 SEPTEMBER 30
2008 2007 2008 2007
- --------------------------------------------------------------------------------------------------------------
REVENUE (Restated) (Restated)
Licensing fees
$ 5,556 $ 5,556 $ 16,668 $ 16,668
----------------------------------------------------------------
TOTAL REVENUE 5,556 5,556 16,668 16,668
----------------------------------------------------------------
EXPENSES
General and administrative 168,094 250,503 598,451 734,702
Research and development 77,703 141,927 280,623 367,603
Litigation expense 88,017 80,355 268,412 239,880
Depreciation and amortization 890 -- 2,670 537
----------------------------------------------------------------
TOTAL EXPENSES 334,704 472,785 1,150,156 1,342,722
----------------------------------------------------------------
LOSS FROM OPERATIONS (329,148) (467,229) (1,133,488) (1,326,054)
OTHER INCOME (EXPENSES)
Interest expense (6,209) (15,259) (63,841) (36,571)
Amortization of discount on
convertible notes (80,339) (219,708) (414,915) (565,184)
Debt conversion expense (91,200) -- (1,247,657) (678,400)
Gain on extinguishment of debt -- 76,166 -- 307,937
----------------------------------------------------------------
LOSS BEFORE TAXES (506,896) (626,030) (2,859,901) (2,298,272)
INCOME TAX EXPENSE -- -- (1,600) --
----------------------------------------------------------------
NET LOSS FOR THE PERIOD $ (506,896) $ (626,030) $ (2,861,501) $ (2,298,272)
================================================================
Loss per common share
BASIC AND DILUTED $ (0.00) $ (0.00) $ (0.01) $ (0.01)
==============================================================================================================
WEIGHTED AVERAGE SHARES - BASIC AND DILUTED 496,245,781 366,751,360 442,678,078 320,907,262
==============================================================================================================
The accompanying notes are an integral part of these unaudited
consolidated financial statements.
5
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED - EXPRESSED IN US DOLLARS)
FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30 2008 2007
- ---------------------------------------------------------------------------------------------
(Restated)
- ---------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net loss for the period $(2,861,501) $(2,298,272)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Amortization of deferred licensing fees (16,668) (16,668)
Depreciation and amortization 2,670 --
Gain on extinguishment of debt -- (307,937)
Amortization of discount on convertible debt (Note 4) 414,915 565.184
Stock for services 28,111 60.000
Debt conversion expense (Note 4) 1,247,657 678,400
Warrant compensation (Note 3) 119,075 317,799
(Increase) decrease in operating assets
Prepaid expenses and other current assets -- --
Increase (decrease) in operating liabilities
Accounts payable 387,073 158.354
Accrued liabilities and provision for lawsuit settlements 379,761 258,348
--------------------------
Net cash used in operating activities (298,907) (584,792)
--------------------------
INVESTING ACTIVITIES
Purchase assets (14,325) (11,351)
--------------------------
Net cash used in investing activities (14,325) (11,351)
--------------------------
FINANCING ACTIVITIES
Convertible Notes Payable 300,000 622,000
Notes Payable 23,500
--------------------------
Net cash provided by financing activities 323,500 622,000
--------------------------
NET INCREASE (DECREASE) IN CASH 10,268 25,857
CASH, beginning of period 2,786 14,745
--------------------------
CASH, end of period $ 13,054 $ 40,602
=============================================================================================
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 CONVERTIBLE DEBT AND INTEREST TO COMMON STOCK $ 1,281,123 $ 100,000
CONVERSION OF SHORT-TERM NOTES AND INTEREST TO COMMON STOCK $ 60,937 $ --
=============================================================================================
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)
SEPTEMBER 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-Q 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
as amended. 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 $135,048,536 and a total capital deficit of $8,660,426 at
September 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)
SEPTEMBER 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 and 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 three
months and nine months ended September 30, 2008 $5,556 and $16,668,
respectively, ($5,556 and $16,668 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)
SEPTEMBER 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)". SFAS No. 123R
requires the Company to establish assumptions and estimates of the
weighted-average fair value of stock options granted, as well as using a
valuation model to calculate the fair value of stock-based awards. The
Company uses the Black-Scholes option-pricing model to determine the
fair-value of stock-based awards. All options are amortized over the
requisite service periods of the awards, which are generally the vesting
periods.
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)
SEPTEMBER 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
three months and nine months ended September 30, 2008 and 2007.
NEW ACCOUNTING PRONOUNCEMENTS
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)
SEPTEMBER 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)
SEPTEMBER 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 September 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 $ 53,162 $ -- $ 53,162
Loans payable 829,776 87,901 917,677
Total Current Liabilities 8,323,867 87,901 8,411,768
TOTAL LIABILITIES 8,626,477 87,901 8,714,378
Additional paid in capital 123,600,485 662,177 124,262,662
Accumulated deficit (130,613,636) (750,078) (131,363,714)
TOTAL CAPITAL DEFICIT (8,573,315) (87,901) (8,661,216)
STATEMENT OF OPERATIONS
Amortization of convertible notes
discount relating to -
Beneficial conversion feature* (311,234) (190,008) (501,242)
Warrants -- (63,942) (63,942)
Debt conversion expense (422,400) (256,000) (678,400)
NET LOSS $ (1,788,322) $(509,950) $ (2,298,272)
12
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED - EXPRESSED IN US DOLLARS)
SEPTEMBER 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 September 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 nine months ended September 30, 2008 the Company issued
162,054,057 shares of common stock, 142,114,317 for conversion of
notes and interest payable, 13,939,740 for additional merger shares
and 6,000,000 for payment of services. During the nine months ended
September 30, 2007, the Company issued 20,000,000 shares of common
stock for conversion of notes payable.
c) 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.
d) 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)
SEPTEMBER 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. Details of the consultant warrants for
the quarter ended September 30, 2008 are as follows:
Total consultant warrants granted 78,200,000
Vested prior to January 1, 2008 16,172,220)
Vested January through September 2008 (5,263,886)
Cancelled January through September 2008 22,044,436)
----------
Warrants not vested 34,719,458
==========
During the nine months ended September 30, 2008 the Company recorded
$119,075 ($317,799 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 nine months ended September 30, 2008 ranged from $0.0124 to
$0.0352. Assumptions used to value the warrants: expected dividend
yield Nil%; expected volatility ranging from 91.39% to 157.41%;
risk-free interest ranged from 2.88% to 3.68% and an expected life
of 7 years.
e) Stock Purchase Warrants
At September 30, 2008 the Company had 42,556,106 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 September 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 5,263,886 $0.01 11,263,886 $0.02
---------- ---------- ----------
Warrants outstanding and
exercisable at end of
period 21,120,000 $0.02 21,436,106 $0.01 42,556,106 $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)
SEPTEMBER 30, 2008 AND 2007
3. SHARE CAPITAL - CONTINUED
At September 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 20,602,778 5.75 $0.01
$0.025 - 0.04 21,953,328 3.95 0.02
--------------------------------------
42,556,106 4.82 $0.02
-------------------------------------------------------
4. LOANS PAYABLE
September December 31,
30, 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 50,329 46,000
Note payable, 18% per annum -- 33,300
Convertible notes payable net of unamortized discount of $19,232 and
$199,726 and warrant valuation of $13,580 and $53,501 in 2008
and 2007, respectively 275,848 983,073
-------------------------
Total Loans Payable $ 464,777 $1,200,973
=========================
15
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED - EXPRESSED IN US DOLLARS)
SEPTEMBER 30, 2008 AND 2007
4. LOANS PAYABLE - CONTINUED
As of September 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 (530,000) (95,000) (441,000) (200,000) (100,000) -- (1,366,000)
---------------------------------------------------------------------------------------------------
85,000 -- -- -- -- 200,000 285,000
---------------------------------------------------------------------------------------------------
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) (118,485) (51,035) (24,198) (34,472) (324,375)
Accumulated amortization of
beneficial conversion feature (521,756) (86,959) (322,515) (148,965) (54,198) (48,820) (1,183,213)
---------------------------------------------------------------------------------------------------
-- -- -- -- -- 32,812 32,812
---------------------------------------------------------------------------------------------------
Accrued Interest 10,760 -- -- -- -- 12,900 23,660
---------------------------------------------------------------------------------------------------
Net Convertible Debt $ 95,760 $ -- $ -- $ -- $ -- $ 180,088 $ 275,848
===================================================================================================
Lower of 70%
of market or
Original conversion price $ 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 4,000,000 2,000,000 4,000,000 21,120,000
---------------------------------------------------------------------------------------------------
Market value of warrants at
date of issuance $ 150,884 $ 48,863 $ 398,872 $ 140,612 $ 41,498 $ 69,572
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
Volatility rate 146% - 151% 153% - 155% 112% - 155% 112% - 155% 109% 107%
Risk free interest rate 4.61% - 5.02% 4.45% - 4.69% 4.46% - 5.01% 2.93% - 5.01% 2.93% 1.90%
16
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED - EXPRESSED IN US DOLLARS)
SEPTEMBER 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 nine
months ended September 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 nine months
ended September 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 nine months
ended September 30, 2008 the amortization of the discount was $414,915.
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 nine months ending September 30, 2008 the Company recognized an
expense of $1,247,657.
Prior to the nine months ended September 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 nine 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 September 30, 2008, the remaining balance of the
beneficial conversion feature was $19,232 and detachable warrants were
$13,580.
17
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED - EXPRESSED IN US DOLLARS)
SEPTEMBER 30, 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 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 September 30, 2008, the Company has included $3,855,593 ($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. December 31, 2007 September 30, 2008
Settlement amount $2,068,079 $2,068,079
Interest 1,727,859 1,464,653
Preference payment 83,000 83,000
Proceeds of stock sale (23,345) (23,345)
----------------------------
Total $3,855,593 $3,592,387
============================
18
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED - EXPRESSED IN US DOLLARS)
SEPTEMBER 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 September 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)
SEPTEMBER 30, 2008 AND 2007
5. COMMITMENTS AND CONTINGENCIES - CONTINUED
d) 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 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
21
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 timely appropriate funding:-
o To have products in the market place by the first quarter of 2009 or as
soon as possible thereafter. We are working on three market areas.
o To get operating income close to, or at breakeven by the second quarter of
2009 or as soon as possible thereafter and positive for the rest of 2009.
There is no assurance that we will obtain sufficient funding or otherwise be
able to achieve our goals within the above timeframes if at all.
During the quarter ended June 30, 2008 the Company had entered into an
arrangement with American Transportation Systems of Los Angeles, CA for the
installation and testing of the Company's patented TurboPac. The arrangement
included a pilot phase to prove diesel fuel savings and emissions reduction, and
if successful, the purchase by American Transportation Systems of TurboPacs for
the retrofit of a select number of vehicles. At this point the Client has not
proceeded and we are not certain when and if they will proceed.
22
RESULTS OF OPERATIONS
------------------------------------------------ -----------------------------------------------
Three Months Ended September 30 Nine Months Ended September 30
------------------------------------------------ -----------------------------------------------
Percentage Percentage
2008 2007 Increase 2008 2007 Increase
(Restated) (Decrease) (Restated) (Decrease)
------------------------------------------------ -----------------------------------------------
Total Revenue $5,556 $5,556 Nil $16,668 $16,668 Nil
Operating Expenses ($334,704) ($472,785) (29%) ($1,150,156) ($1,342,722) (14%)
---------------------------------- ---------------------------------
Net Loss from
Operations ($329,148) ($467,229) (30%) ($1,133,488) ($1,326,054) (15%)
Other Income
(Expenses) ($177,748) ($158,801) 12% ($1,728,013) ($972,218) 78%
================================== =================================
Net (Loss) ($506,896) ($626,030) (19%) ($2,861,501) ($2,298,272) 25%
================================== =================================
NET REVENUE
------------------------------------------------ -----------------------------------------------
Three Months Ended September 30 Nine Months Ended September 30
------------------------------------------------ -----------------------------------------------
Percentage Percentage
2008 2007 Increase 2008 2007 Increase
------------------------------------------------ -----------------------------------------------
License Fee $5,556 $5,556 Nil $16,668 $16,668 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 nine month periods
ended September 30, 2008 and 2007, $5,556 and $16,668 of licensing fees was
recognized as income, respectively. Our continued net losses from operations
reflect our continued operating expenses and our inability to generate revenues.
We believe that we will not be able to generate any significant revenues from
TurboPac(TM)/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 decreased from the comparable period in 2007. The primary
components of our operating expenses and principal reason for changes are
outlined in the table below:
----------------------------------------- -------------------------------------------
Three Months Ended September 30 Nine Months Ended September 30
----------------------------------------- -------------------------------------------
Percentage Percentage
Increase Increase
2008 2007 (Decrease) 2008 2007 (Decrease)
----------------------------------------- -------------------------------------------
General and Administrative
Expenses $168,094 $250,503 (33%) $598,451 $734,702 (19%)
Research and Development
Expenses $77,703 $141,927 (45%) $280,623 $367,603 (24%)
Litigation Expenses $88,017 $80,355 10% $268,412 $239,880 12%
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses primarily included management compensation
costs as well as overhead. The decline of these expenses for the three and nine
months ended September 30, 2008 compared to prior periods in 2007 is due to
decreased spending for consulting fees due to lack of financing as well as a
corresponding decrease in the non cash warrant expense. Management compensation
costs included non cash (i) stock compensation expense of $10,000 and $28,111
for the three months and nine months ended September 30, 2008 compared to none
in 2007 and (ii) warrant expense of $19,822 and $86,209 for the three months and
nine months ended September 30, 2008 compared to $64,390 and $225,444 in prior
periods of 2007. (Financial Statement Note 3). These non cash expenses are
discussed in "Compensation Expense" below.
RESEARCH AND DEVELOPMENT
The decrease in research and development costs in 2008 for the three months and
nine months ended September 30, 2008 is due to decreased spending for consulting
fees due to lack of financing as well as a corresponding decrease in the non
cash warrant expense. The amount of the latter was $3,669 and $32,866 for the
three months and nine months ended September 30, 2008 compared to $66,200 and
$92,355, respectively, for the prior periods. 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 2008 are associated
with the development of our TurboPac-related technology.
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.
24
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 as discussed above.
Of these warrants, 22,044,436 were cancelled due to termination of the
consulting contracts and 5,263,886 were vested and reflected as an expense for
the nine months ended September 30, 2008. The total vested and expensed from the
grant date through September 30, 2008 was 21,436,106 warrants. We recognized
$119,075 of non-employee compensation expense during the nine months ended
September 30, 2008 compared to $317,799 during the nine months ended September
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 1,000,000 have vested as of
September 30, 2008. As a result we recognized non cash stock compensation
expense of $10,000 and $28,111 (Nil in 2007) for the three and nine months ended
September 30, 2008. Subsequent to September 30, 2008 the 1,000,000 shares were
issued.
OTHER INCOME (EXPENSE)
------------------------------------------- ----------------------------------------------
Three Months Ended September 30 Nine Months Ended September 30
------------------------------------------- ----------------------------------------------
Percentage Percentage
Increase Increase
2008 2007 (Decrease) 2008 2007 (Decrease)
(Restated) (Restated)
------------------------------------------- ----------------------------------------------
Gain on Extinguishment
of debt
- $76,166 (100%) -- $307,937 (100%)
---------------------------- -------------------------------
OTHER EXPENSES
Interest Expense ($6,209) ($15,259) (59%) ($63,841) ($36,571) 75%
Amortization of Discount
on Convertible Notes ($80,339) ($219,708) (63%) ($414,915) ($565,184) (27%)
Inducement Expense ($91,200) -- -- ($1,247,657) ($678,400) 84%
Income Tax Expense -- -- -- ($1,600) -- 100%
--------------------------------------------------------------------------------------------
Total Other Expenses ($177,748) ($234,967) (24%) ($1,728,013) ($1,280,155) 35%
--------------------------------------------------------------------------------------------
Other Income and Expenses ($177,748) ($158,801) (12%) ($1,728,013) ($972,218) 78%
============================================================================================
25
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 September 30, 2008 of
$177,748 compared to $1,728,013 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 4).
The Company continues to negotiate with our creditors and trade debt holders to
settle accounts payable. If achieved, in an amount below the recorded amount,
could result in debt extinguishment income.
NET INCOME / LOSS
Our net loss for the quarter ended September 30 2008 decreased to $506,896 from
net loss of $626,030 for the quarter ended September 30, 2007, representing a
decrease of 19%. The decrease is directly related to the decrease 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 $138,081 or 30%.
We believe, however that recent technical developments provide the Company with
potential for substantial revenue in three market areas but this will require
funding. Given appropriate funding we believe we could have the product in the
marketplace by the first quarter of 2009 and achieve operating income close to,
or at breakeven by the second quarter of 2009 and positive for the rest of 2009.
To the extent funding is delayed these goals will be delayed. 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
------------------------------------------------------
September 30, 2008 December 31, 2007 Percentage
Increase
------------------------------------------------------
Current Assets $13,726 $3,458 297%
Current Liabilities ($8,414,934) ($8,619,585) (2%)
------------------------------------------------------
Working Capital Deficit ($8,401,208) ($8,616,127) (2%)
======================================================
The decrease to our working capital deficit was primarily attributable to a
decrease in convertible notes outstanding since the accounts payable, accrued
liabilities and provision for lawsuit settlements all increased as discussed
below.
LIABILITIES
------------------------------------------------------------
September 30, 2008 December 31, 2007 Percentage
Increase/ (Decrease)
------------------------------------------------------------
Provisions for Lawsuit Settlements $5,257,378 $4,994,173 5%
Accounts Payable $2,339,512 $2,132,439 10%
Accrued Liabilities $353,267 $292,000 21%
Short-Term Loans $464,777 $1,200,973 (61%)
The increase in provision for lawsuits is primarily due to accrued interest on
outstanding judgments. Short-term loans decreased due to the conversion of
$1,281,123 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
$19,232 ($199,726 in 2007) and warrant allocation of $13,580 ($53,501 in 2007)
which nevertheless represents actual cash obligations (Financial Statement Note
4).
Included in short-term loans at September 30, 2008 are unsecured, non-interest
bearing advances of $138,600 that we anticipate will be converted into shares of
our common stock.
27
CASH FLOWS
-------------------------
At September 30,
-------------------------
2008 2007
---- ----
(Restated)
Net Cash provided by (used in) Operating Activities ($298,907) ($584,792)
Net Cash provided by (used in) Investing Activities ($14,325) ($11,351)
Net Cash provided by (used in) Financing Activities $323,500 $622,000
Net Increase (Decrease) in Cash During Period $10,268 $25,857
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
We account 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)". SFAS No. 123R requires us to
establish assumptions and estimates of the weighted-average fair value of stock
options granted, as well as using a valuation model to calculate the fair value
of stock-based awards. We use the Black-Scholes option-pricing model to
determine the fair-value of stock-based awards. All options are amortized over
the requisite service periods of the awards, which are generally the vesting
periods.
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 nine months ended September
30, 2008, $16,668 ($16,668 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. 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.
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.
30
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 September 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
N/A
ITEM 2. CHANGES IN SECURITIES.
The following issuances of securities occurred during the three months ended
September 30, 2008.
During the three months ended September 30, 2008 $596,000 of principal of the
Companies 18% convertible notes were converted into 52,907,029 shares of our
common stock at a conversion price of either one-half penny ($0.005) or two
cents ($0.02) per share. These 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 November 14, 2008
and Director
/s/ Debi Kokinos Chief Financial Officer November 14, 2008
and Chief Accounting Officer