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, 2010
[ ] 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
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
888 SEVENTH AVENUE, 17TH FLOOR, NEW YORK, NY 10106
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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)
Indicate by checkmark 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 registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (ss.232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). [ ] Yes [X] No
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: 661,932,486 shares of common stock
issued and outstanding as of AUGUST 17, 2010.
Turbodyne Technologies, Inc.
INDEX TO FORM 10-Q
JUNE 30, 2010
PAGE
NUMBER
------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of June 30, 2010
and December 31, 2009 4
Condensed Consolidated Statements of Operations for the three
and six month periods ended June 30, 2010 and
June 30, 2009 5
Condensed Consolidated Statements of Cash Flows for the six
month periods ended June 30, 2010 and June 30, 2009 6
Notes to the Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis or Plan of Operations 23
Item 3. Quantitative and Qualitative Disclosures About Market Risk NA
Item 4. Controls and Procedures 30
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 32
Item 1A. Risk Factors NA
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 32
Item 3. Defaults Upon Senior Securities NA
Item 4. Submission of Matters to a Vote of Security Holders NA
Item 5. Other Information 32
Item 6. Exhibits 33
SIGNATURES 34
2
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED
JUNE 30, 2010 AND 2009
(UNAUDITED - EXPRESSED IN US DOLLARS)
3
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(EXPRESSED IN US DOLLARS)
JUNE 30 DECEMBER 31
2010 2009
- ------------------------------------------------------------------------------------------------------
ASSETS (UNAUDITED)
CURRENT
Cash $ 54 $ 3,037
------------------------------
TOTAL CURRENT ASSETS 54 3,037
PROPERTY AND EQUIPMENT, net 11,198 13,408
------------------------------
TOTAL ASSETS $ 11,252 $ 16,445
======================================================================================================
LIABILITIES AND STOCKHOLDERS' DEFICIT
LIABILITIES
CURRENT
Accounts payable $ 2,074,909 $ 2,002,746
Accrued liabilities 202,000 300,000
Provision for lawsuit settlements (Note 5) 5,943,463 5,731,145
Loans payable (Note 3) 271,826 550,777
------------------------------
TOTAL CURRENT LIABILITIES 8,492,198 8,584,668
------------------------------
LONG-TERM
Loans payable (Note 4) 115,648 184,237
Deferred licensing fee 241,494 252,606
------------------------------
TOTAL LONG-TERM LIABILITIES 357,142 436,843
------------------------------
TOTAL LIABILITIES 8,849,340 9,021,511
------------------------------
STOCKHOLDERS' DEFICIT
Share Capital (Note 2)
Authorized
1,000,000 preferred shares, par value $0.001
1,000,000,000 common shares, par value $0.001
Issued
12,675 Series X preferred shares in 2010 and 2009 12 12
661,932,486 and 577,580,158 common shares in 2010 and 2009, 661,932 577,581
respectively
Treasury stock, at cost (5,278,580 shares) (1,963,612) (1,963,612)
Additional paid-in capital 128,456,693 128,029,567
Other comprehensive income -
Foreign exchange translation gain 35,119 35,119
Accumulated deficit (136,028,232) (135,683,733)
------------------------------
TOTAL STOCKHOLDERS' DEFICIT (8,838,088) (9,005,065)
------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 11,252 $ 16,445
======================================================================================================
The accompanying notes are an integral part of these unaudited
consolidated financial statements.
4
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED - EXPRESSED IN US DOLLARS)
THREE-MONTH SIX-MONTH
PERIODS ENDED PERIODS ENDED
JUNE 30 JUNE 30
2010 2009 2010 2009
- --------------------------------------------------------------------------------------------------------------
REVENUE
Licensing fees
$ 5,556 $ 5,556 $ 11,112 $ 11,112
----------------------------------------------------------------
TOTAL REVENUE 5,556 5,556 11,112 11,112
----------------------------------------------------------------
EXPENSES
General and administrative (37,460) 94,003 100,337 192,132
Research and development -- 48,221 -- 74,029
Litigation expense 106,159 96,508 212,318 193,016
Depreciation and amortization 1,105 1,502 2,210 3,004
----------------------------------------------------------------
69,804 240,234 314,865 462,181
----------------------------------------------------------------
LOSS FROM OPERATIONS (64,248) (234,678) (303,753) (451,069)
OTHER INCOME (EXPENSES)
Interest expense (6,488) (13,761) (23,125) (23,060)
Amortization of discount on
convertible notes (11,287) (2,884) (16,021) (2,884)
Gain on extinguishment of debt -- 70,510 -- 70,510
----------------------------------------------------------------
LOSS BEFORE TAXES (82,023) (180,813) (342,899) (406,503)
INCOME TAX EXPENSE -- -- (1,600) (1,600)
----------------------------------------------------------------
NET LOSS FOR THE PERIOD $ (82,023) $ (180,813) $ (344,499) $ (408,103)
================================================================
Loss per common share
BASIC AND DILUTED $ (0.00) $ (0.00) $ (0.00) $ (0.00)
==============================================================================================================
WEIGHTED AVERAGE SHARES - BASIC AND DILUTED 642,502,777 550,513,491 611,248,436 550,513,491
==============================================================================================================
The accompanying notes are an integral part of these unaudited
consolidated financial statements.
5
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED - EXPRESSED IN US DOLLARS)
FOR THE SIX-MONTH PERIODS ENDED JUNE 30 2010 2009
- -----------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net loss for the period $(344,499) $(408,103)
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 2.210 3,004
Amortization of discount on convertible debt (Note 3 & 4) 16,021 2,884
Stock for services 60,222 3,444
Warrant compensation (Note 2) 19,571 11,890
(Increase) decrease in operating assets
Prepaid expenses and other current assets -- --
Increase (decrease) in operating liabilities
Accounts payable 72,163 46,546
Accrued liabilities and provision for lawsuit settlements 137,441 230,500
----------------------
Net cash used in operating activities (47,983) (120,947)
----------------------
FINANCING ACTIVITIES
Proceeds from exercise of warrants 20,000
Proceeds from issuance of convertible notes 25,000 150,000
----------------------
Net cash provided by financing activities 45,000 150,000
----------------------
NET INCREASE (DECREASE) IN CASH (2,983) 29,053
CASH, beginning of period 3,037 68
----------------------
CASH, end of period $ 54 $ 29,121
=========================================================================================
SUPPLEMENTARY DISCLOSURE OF NON-CASH INFORMATION
BENEFICIAL CONVERSION FEATURE OF CONVERTIBLE DEBT $ 3800 $ --
VALUE OF WARRANTS ISSUED WITH CONVERTIBLE DEBT 3800 34,257
CONVERSION OF INTEREST AND NOTES PAYABLE TO COMMON STOCK 404,086 --
=========================================================================================
The accompanying notes are an integral part of these unaudited
consolidated financial statements.
6
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited - Expressed in US Dollars)
JUNE 30, 2010 AND 2009
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.
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 $136,028,232 at June 30, 2010 and a total capital deficit of
$8,838,088 at June 30, 2010. 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.
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, 2009 and 2008 included in the Company's 10-K 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.
7
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED - EXPRESSED IN US DOLLARS)
JUNE 30, 2010 AND 2009
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 measurement equipment - 3 years
Machinery and equipment - 7 to 15 years
Furniture and fixtures - 5 to 10 years
VALUATION OF LONG-LIVED ASSETS
The Company periodically and at least, annually, 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 2010 and
2009.
8
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED - EXPRESSED IN US DOLLARS)
JUNE 30, 2010 AND 2009
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
CONTINUED
FAIR VALUE MEASUREMENTS
On January 1, 2008, the provisions of ASC Topic 820, FAIR VALUE
MEASUREMENTS AND DISCLOSURES, became effective for the Company. Fair value
is defined as the exchange price that would be received for an asset or
paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction
between market participants at the measurement date. The Company reports
assets and liabilities that are measured at fair value using a three-level
fair value hierarchy that prioritizes the inputs used to measure fair
value. This hierarchy maximizes the use of observable inputs and minimizes
the use of unobservable inputs. The three levels of inputs used to measure
fair value are as follows:
o Level 1 -- Quoted prices in active markets for identical
assets or liabilities.
o Level 2 -- Observable inputs other than quoted prices included
in Level 1, such as quoted prices for similar assets and
liabilities in active markets; quoted prices for identical or
similar assets and liabilities in markets that are not active;
or other inputs that are observable or can be corroborated by
observable market data.
o Level 3 -- Unobservable inputs that are supported by little or
no market activity and that are significant to the fair value
of the assets or liabilities. This includes certain pricing
models, discounted cash flow methodologies and similar
techniques that use significant unobservable inputs.
An asset's or liability's level within the fair value hierarchy is based
on the lowest level of any input that is significant to the fair value
measurement. At each reporting period, we perform a detailed analysis of
our assets and liabilities that are measured at fair value. All assets and
liabilities for which the fair value measurement is based on significant
unobservable inputs or instruments which trade infrequently and therefore
have little or no price transparency are classified as Level 3.
All financial liabilities that are measured at fair value have been
segregated into the most appropriate level within the fair value hierarchy
based on the inputs used to determine the fair value at the measurement
date. The Company believes that the carrying value of its cash, accounts
payable and accrued liabilities as of June 30, 2010 and December 31, 2009
approximate their fair values because of the short-term nature of those
instruments.
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 six
months ended June 30, 2010 $11,112 ($11,112 in 2009) of licensing fees was
recognized as income.
9
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED - EXPRESSED IN US DOLLARS)
JUNE 30, 2010 AND 2009
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
CONTINUED
EARNINGS (LOSS) 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 year. Diluted earnings per share reflect the
potential dilution of securities that could share in earnings of an
entity. In a loss year, dilutive common equivalent shares are excluded
from the loss per share calculation as the effect would be anti-dilutive.
For the six months ended June 30, 2010, 12,675 preferred shares
convertible into 1,267,500 shares of common stock and options and warrants
to purchase 9,674,000 and 53,408,875 shares of common stock, convertible
notes to purchase 29,353,005 shares of common stock were outstanding
during the period. The weighted average cumulative equivalent shares of
610,534,624 were included in the denominator for 2010 computation of basic
earnings (loss) per share. No other adjustments were made for purposes of
per share calculations. For the six months ended June 30, 2009, 12,675
preferred shares convertible into 1,267,500 shares of common stock and
options and warrants to purchase 17,599,000 and 49,386,655 shares of
common stock, convertible notes to purchase 28,785,515 shares of common
stock were outstanding during the period. The weighted average cumulative
equivalent shares of 550,513,491 were included in the denominator for 2010
computation of diluted earnings (loss) per share. No other adjustments
were made for purposes of per share calculations.
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
In accordance with the provisions of ASC Topic 718, Compensation--Stock
Compensation, which 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.
10
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED - EXPRESSED IN US DOLLARS)
JUNE 30, 2010 AND 2009
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
CONTINUED
RESEARCH AND DEVELOPMENT
Research and development costs related to present and future products are
charged to operations in the period incurred. Previously, research
prototypes were sold and proceeds reflected by reductions in our research
and development costs. As new technology pre-production manufacturing
units are produced and related non-recurring engineer services are
delivered we will recognize the sales proceeds as revenue.
INCOME TAXES
The Company accounts for income taxes under the asset and liability method
of accounting for income taxes, which recognizes deferred tax assets and
liabilities for the estimated future tax consequences attributable to
differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates in effect for the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the
enactment date. The components of the deferred tax assets and liabilities
are classified as current and non-current based on their characteristics.
A valuation allowance is provided for certain deferred tax assets if it is
more likely than not that the Company will not realize tax assets through
future operations. There are no deferred tax benefits recorded. The $1,600
expense is the $800 State of California annual minimum tax for two
companies and was charged to income in the first quarter of 2010.
LEGAL FEES
The Company expenses legal fees in connection with litigation as incurred.
COMPREHENSIVE INCOME
ASC Topic 323, INVESTMENTS - EQUITY METHOD AND JOINT VENTURES, 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 foreign currency translation adjustments were immaterial to the
Company's consolidated financial statements, net earnings (loss)
approximated comprehensive income for the three and six months ended June
30, 2010 and 2009.
11
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED - EXPRESSED IN US DOLLARS)
JUNE 30, 2010 AND 2009
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
CONTINUED
NEW ACCOUNTING PRONOUNCEMENTS
In April 2010, the FASB issued Accounting Standards Update 2010-13,
COMPENSATION--STOCK COMPENSATION (TOPIC 718): EFFECT OF DENOMINATING THE
EXERCISE PRICE OF A SHARE-BASED PAYMENT AWARD IN THE CURRENCY OF THE
MARKET IN WHICH THE UNDERLYING EQUITY SECURITY TRADES. ASU 2010-13 updates
ASC 718 to codify the consensus reached in EITF Issue No. 09-J, EFFECT OF
DENOMINATING THE EXERCISE PRICE OF A SHARE-BASED PAYMENT AWARD IN THE
CURRENCY OF THE MARKET IN WHICH THE UNDERLYING EQUITY SECURITY TRADES. The
ASU clarifies that share-based payment awards with an exercise price
denominated in the currency of a market in which a substantial portion of
the underlying equity security trades should not be considered to meet the
criteria requiring classification as a liability. The updated guidance is
effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2010. Early adoption is permitted. The
provisions of ASU 2010-13 is not expected to have an impact on the
Company's financial statements.
In February 2010, the FASB issued Accounting Standards Update 2010-09,
SUBSEQUENT EVENTS (TOPIC 855): AMENDMENTS TO CERTAIN RECOGNITION AND
DISCLOSURE REQUIREMENTS. ASU 2010-09 removes the requirement for an SEC
filer to disclose a date through which subsequent events have been
evaluated in both issued and revised financial statements. Revised
financial statements include financial statements revised as a result of
either correction of an error or retrospective application of U.S. GAAP.
The FASB also clarified that if the financial statements have been
revised, then an entity that is not an SEC filer should disclose both the
date that the financial statements were issued or available to be issued
and the date the revised financial statements were issued or available to
be issued. The FASB believes these amendments remove potential conflicts
with the SEC's literature. In addition, the amendments in the ASU requires
an entity that is a conduit bond obligor for conduit debt securities that
are traded in a public market to evaluate subsequent events through the
date of issuance of its financial statements and must disclose such date.
All of the amendments in the ASU were effective upon issuance (February
24, 2010) except for the use of the issued date for conduit debt obligors.
That amendment is effective for interim or annual periods ending after
June 15, 2010. The provisions of ASU 2010-09 did not have a material
impact on the Company's financial statements.
12
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED - EXPRESSED IN US DOLLARS)
JUNE 30, 2010 AND 2009
2. 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, 2010, 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, 2010 the Company issued
84,352,328 shares of common stock, 76,352,328 for conversion of
notes and interest payable, 2,000,000 for exercise of warrants and
6,000,000 for payment of services. .
During the six months ended June 30, 2009 the Company issued
1,000,000 shares of common stock for payment of services.
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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED - EXPRESSED IN US DOLLARS)
JUNE 30, 2010 AND 2009
2. SHARE CAPITAL - CONTINUED
c) Stock Options - Continued
Grant of Stock Options to Non-employees for Services
During 2009 we granted warrants to purchase 41,600,000 shares of our
common stock to various consultants that we deemed essential to our
operations.
Total consultant warrants granted 41,600,000
Vested prior to January 1, 2010 (3,466,664)
Vested January through June 30, 2010 (2,311,104)
-----------
Warrants not vested 35,822,232
===========
During the six months ended June 30, 2010 the Company using the
Black-Scholes model recorded $19,571 ($11,890 in 2009) of
compensation expense, relating to the vesting of stock warrants
previously issued to non-employees for services. The non cash
warrant expense is allocated with $19,571 ($10,082 in 2009) to
general and administrative expenses and $-0- ($1,808 in 2009) to
research and development.
The estimated fair value of warrants issued to non-employees during
the six months ended June 30, 2010 ranged from $0.0053 to $0.0121.
Assumptions used to value the warrants: expected dividend yield
Nil%; expected volatility of 130.65% and 129.52%; risk-free interest
rate of 3.08%, 3.05%, 3.28%,3.12%, 2.75% and 2.42% and an expected
life of 7 years.
d) Stock Purchase Warrants
At June 30, 2010 the Company had 53,408,875 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 $0.01 to
$0.04 per share with a weighted average exercise price of $0.0138
per share and expiration dates between 2011 and 2016. Details of
share purchase warrants for the six months ended June 30, 2010 are
as follows:
14
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED - EXPRESSED IN US DOLLARS)
JUNE 30, 2010 AND 2009
2. SHARE CAPITAL - CONTINUED
INVESTORS EMPLOYEES & CONSULTANTS TOTAL
-----------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
WARRANTS PRICE WARRANTS PRICE WARRANTS PRICE
-----------------------------------------------------------------------
Outstanding at beginning of period 24,120,000 $ 0.02 28,477,765 $ 0.01 52,597,765 $ 0.02
Vested 500,000 $ 0.01 2,311,110 $ 0.01 2,811,110 $ 0.01
Exercised (2,000,000) $ 0.005 - $ -- (2,000,000) $ 0.005
----------- ---------- ----------
Warrants outstanding and
exercisable at end of period 22,620,000 $ 0.02 30,788,875 $ 0.01 53,408,875 $ 0.02
=========== ========== ==========
Weighted average fair value of
warrants granted during the period -- -- $ 0.01 $ 0.01
======================================================================
At June 30, 2010, 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 31,455,547 4.59 $0.01
$0.025 - 0.04 21,953,328 2.21 0.02
---------------
53,408,875 4.32 $0.02
===============
3. CURRENT LOANS PAYABLE
June 30, December 31,
2010 2009
------------------------
Unsecured, non-interest bearing loan payable, due on
demand to stockholders and other parties $138,600 $138,600
Note payable, 5% per annum , due in 2007 and 2008 - related party 54,354 53,204
(see note 3 and 6)
Convertible notes payable, 5% per annum, due in 2006 and 2007 - 42,730 41,856
related party (note 3 and 6)
Convertible notes payable 5% per annum, due May 26, 2007 36,142 317,117
------------------------
Total Current Loans Payable $271,826 $550,777
------------------------
15
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED - EXPRESSED IN US DOLLARS)
JUNE 30, 2010 AND 2009
3. CURRENT LOANS PAYABLE - CONTINUED
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 (550,000) (95,000) (441,000) (200,000) (100,000) 200,000) (1,586,000)
---------------------------------------------------------------------------------------------
65,000 -- -- -- -- -- 65,000
---------------------------------------------------------------------------------------------
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) (48,052) (337,955)
Accumulated amortization of
beneficial conversion feature (521,756) (86,959) (322,515) (148,965) (54,198) (68,052) (1,202,445)
---------------------------------------------------------------------------------------------
-- -- -- -- -- -- --
---------------------------------------------------------------------------------------------
Accrued Interest 13,872 -- -- -- -- -- 13,872
---------------------------------------------------------------------------------------------
Net Convertible Debt $ 78,872 $ -- $ -- $ -- $ -- $ -- $ 78,872
=============================================================================================
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 6,000,000 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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED - EXPRESSED IN US DOLLARS)
JUNE 30, 2010 AND 2009
3. LOANS PAYABLE - CONTINUED
For the six months ended June 30, 2010 the Company did not issue any
short-term convertible notes.
For the years ended December 31, 2008, 2007 and 2006, the Company issued
$300,000, $691,000 and $660,000, respectively, of convertible notes. All
remaining notes are in default. All of the convertible notes were issued
with detachable warrants to purchase 6,000,000, 13,820,000, and 13,200,000
shares of the Company's common stock, respectively. In recording the
transaction, the Company allocated the value of the proceeds to the
convertible notes and the warrants based on their relative fair values.
Fair value of the warrants was determined using the Black-Scholes
valuation model. It was also determined that the convertible notes
contained a beneficial conversion feature since the fair market value of
the common stock issuable upon the conversion of the notes exceeded the
value allocated to the notes.
The value of the beneficial conversion feature and the value of the
warrants were recorded as a discount to convertible notes and were
amortized over the term of the notes using the straight-line method. As of
December 31, 2009, debt discount from the warrants and the beneficial
conversion feature have been fully amortized. For the three months ended
June 30, 2010 $220,000 of convertible notes were converted into 54,000,000
shares of the Company's common stock. Of the notes issued from 2006
through 2008, $65,000 remain outstanding and had accrued interest of
$73,972 as of December 31, 2009 and $13,872 as of June 30, 2010. The
notes, issued prior to September 1, 2007, bear interest at 5% and mature
within one year from date of issuance.
The notes, issued after September 1, 2007, bear interest at 18% and mature
within six months from date of issuance. The warrants are to purchase the
Company's common stock at $0.025 per share expiring in five years.
17
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED - EXPRESSED IN US DOLLARS)
JUNE 30, 2010 AND 2009
4. LONG-TERM LOANS PAYABLE
June 30, December 31,
2010 2009
----------------------
Long-term convertible loans payable $ 125,000 $ 200,000
Accrued Interest 10,787 12,798
Less Debt discount from beneficial conversion feature
and warrants (20,139) (28,561)
----------------------
Total Long-term Convertible Loans Payable $ 115,648 $ 184,237
======================
For the six months ended June 30, 2010, the Company issued $25,000 of
convertible notes. For the year ended December 31, 2009, the Company
issued $200,000 of convertible notes. All of the convertible notes were
issued with detachable warrants to purchase shares of the Company's
common stock. The warrants issued were 500,000 in 2010 and 4,000,000 in
2009. In recording the transaction, the Company allocated the value of
the proceeds to the convertible notes and the warrants based on their
relative fair values. Fair value of the warrants was determined using the
Black-Scholes valuation model. It was also determined that the
convertible notes contained a beneficial conversion feature since the
fair market value of the common stock issuable upon the conversion of the
notes exceeded the value allocated to the notes.
The Convertible Notes have a two year maturity with 12% annual interest
rate payable at maturity or at the time of conversion. The Note may be
converted, at the option of the note-holder, at any time after issuance
until the note is paid in full. The conversion price is at a price equal
to $.01; provided that Conversion shall be subject to a minimum
conversion amount of $10,000, or if less, the remaining Outstanding
Obligation. The warrants have an exercise price of $.01 and a 5-year
expiration date.
The value of the warrants has been recorded as a discount to the
convertible notes and is being amortized over the term of the notes using
the straight-line method. For the six months ended June 30, 2010 the
amortization of the discount was $13,546. As of June 30, 2010, the
remaining balance of the detachable warrants was $11,598. As of December
31, 2009, the remaining balance of the detachable warrants was $21,345.
The value of the beneficial conversion feature has been recorded as a
discount to convertible notes and is being amortized over the term of the
notes using the straight-line method. For the six months ended June 30,
2010, the amortization of the discount was $2,474. As of June 30, 2010,
the remaining balance of the beneficial conversion feature is $8,541. As
of December 31, 2009, the remaining balance of the beneficial conversion
feature was $7,216.
18
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED - EXPRESSED IN US DOLLARS)
JUNE 30, 2010 AND 2009
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.
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, 2010, the Company has included $4,456,678 ($4,039,836 in 2009)
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, December 31,
2010 2009
--------------------------
Settlement amount $ 2,068,079 $ 2,068,079
Interest 2,413,944 2,201,626
Preference payment 83,000 83,000
Proceeds of stock sale (23,345) (23,345)
--------------------------
Total $ 4,541,678 $ 4,329,360
- ---------------------------------------------------------------------------
19
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED - EXPRESSED IN US DOLLARS)
JUNE 30, 2010 AND 2009
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,
2010, the Company has included $405,785 in regard to this matter in
the provision for lawsuit settlements.
20
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED - EXPRESSED IN US DOLLARS)
JUNE 30, 2010 AND 2009
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.
21
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED - EXPRESSED IN US DOLLARS)
JUNE 30, 2010 AND 2009
6. RELATED PARTY TRANSACTIONS
Aspatuck Holdings Ltd. and another entity affiliated with Jason Meyers
have advanced an aggregate of $ 46,000 to the Company plus related
interest expense of $8,354 for 2010 and $7,204 for 2009. The advances are
repayable on demand and bear interest at 5 % per annum. See Note 3 Loan
Payable. As of June 30, 2010 and December 31, 2009 the Company also owes
Aspatuck Holdings Ltd consulting fees of $472,227 and $417,227,
respectively, for the services of Jason Meyers. The Company has included
these consulting fees in accounts payable in the balance sheet. The
Company has included $30,000 of consulting compensation in the general and
administrative expense for the quarters ended June 30, 2010 and 2009. The
Company also included $15,055 and $7,755 of non cash warrant expense for
the six months ended June 30, 2010 and 2009 respectively.
The Company has agreed to pay Aspatuck Holdings, Ltd. $64,000 of the
accounts payable owed as funds become available and then $10,000 per month
until repaid. The accounts payable is for the services of the primary
shareholder of Aspatuck, Jason Meyers.
John Adams, co-CEO has advanced an aggregate of $35,000 in convertible
notes as a private investor. The notes were due in November 2006 and July
2007 but remain unpaid as of June 30, 2010 and December 31, 2009, with
total outstanding balance of $42,730 and $41,856, respectively, which
includes accrued interest of $7,730 and $5,981, respectively. The Company
recorded $6,222 and $3,444 general and administrative expense for the
stock compensation to be issued to John Adams for the six months ended
June 30, 2010 and 2009, respectively.
As of June 30, 2010 and December 31, 2009 the Company owes Debi Kokinos,
CFO consulting fees of $127,880 and $92,350, respectively. The Company has
included these consulting fees in accounts payable in the balance sheet.
The Company has included $19,380 of consulting compensation in the general
and administrative expense for the quarters ended June 30, 2010 and 2009.
The company also included $4,516 and $1,357 of non cash warrant expense
for the six months ended June 30, 2010 and 2009 respectively.
7. SUBSEQUENT EVENTS
The Company has evaluated subsequent events for recognition or disclosure
in the financial statements filed on Form 10-Q with the SEC and no other
events, other than those described in these notes, have occurred that
require disclosure.
22
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
under development are designed to 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.
23
RESULTS OF OPERATIONS
---------------------------------------------- -------------------------------------------
Three Months Ended June 30 Six Months Ended June 30
---------------------------------------------- -------------------------------------------
Percentage Percentage
2010 2009 Increase 2010 2009 Increase
(Decrease) (Decrease)
---------------------------------------------- -------------------------------------------
Total Revenue $5,556 $5,556 Nil $11,112 $11,112 Nil
Operating Expenses ($69,804) ($240,234) (71%) ($314,865) ($462,181) (32%)
--------------------------------- -------------------------------
Net Loss from
Operations ($64,248) ($234,678) (73%) ($303,753) ($451,069) (33%)
Other Income
(Expenses) and ($17,775) $53,865 (133%) ($40,746) $42,966 (195%)
Income taxes
================================= ===============================
Net (Loss) ($82,023) ($180,813) 55% ($344,499) ($408,103) 16%
================================= ===============================
NET REVENUE
------------------------------------------------ -----------------------------------------------
Three Months Ended June 30 Six Months Ended June 30
------------------------------------------------ -----------------------------------------------
Percentage Percentage
2010 2009 Increase 2010 2009 Increase
------------------------------------------------ -----------------------------------------------
License Fee $5,556 $5,556 Nil $11,112 $11,112 Nil
We had no revenue in 2010 other than recognition of amortized license fees.
During the year ended December 31, 2003, $400,000 in license fees were deferred
and amortized over 18 years. As a result, for each of the quarters ended June
30, 2010 and 2009, $5,556 of licensing fees was recognized as income. Our
continued net losses from operations reflect our continued operating expenses
and our inability to generate revenues. We believe that we will not be able to
generate any significant revenues from TurboPac(TM)/TurboFlow(TM) until we
complete our production models and enter into commercial arrangements.
COST OF SALES
We had no sales in 2010 and 2009; therefore we did not have any costs of sales
during any portion of these years.
24
OPERATING EXPENSES
Due to a lack of funds we reduced our operations in the first and second quarter
of 2010 so that operating expenses decreased from the comparable period in 2009
by 43%. 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
2010 2009 (Decrease) 2010 2009 (Decrease)
----------------------------------------- -------------------------------------------
General and Administrative
Expenses
($37,460) $94,003 (140%) $100,337 $192,132 (48%)
Research and Development
Expenses -- $48,221 (100%) -- $74,029 (100%)
Litigation Expenses $106,159 $96,508 10% $212,318 $193,016 (10%)
GENERAL AND ADMINISTRATIVE EXPENSES
For the three and six months ended June 30, 2010 the general and administrative
costs included management compensation and overhead and included non cash
warrant and stock compensation expense amount of $19,571 and $6,222 ($10,082 and
$3,444 in 2009) respectively. The decrease in general and administrative costs
for the three and six months ended June 30, 2010 is due to a $140,000 write off
of an accrued liability that is no longer applicable.
RESEARCH AND DEVELOPMENT
During the three and six months ended June 30, 2010 our research and development
activities are associated with the development of our TurboPac through the
efforts of D. Brown Traktoren GmbH. Even though there is an absence of research
and development costs there is current work being done on the TurboPac under an
existing contract with D. Brown Traktoren GmbH for the services of Augustin
Thalhofer. Our research and development costs related to present and future
products are charged to operations in the period incurred.
LITIGATION EXPENSE
The litigation expense is the accrued interest relating to the TST, Inc.
settlement which is payable only upon bankruptcy of the Company.
25
COMPENSATION EXPENSE
Grant of Stock Options to Non-employees for Services
During 2009 we granted warrants to purchase 41,600,000 shares of our common
stock to various consultants that we deemed essential to our operations.
Total consultant warrants granted 41,600,000
Vested prior to January 1, 2010 (3,466,664)
Vested January through June 30, 2010 (2,311,104)
-----------------
Warrants not vested 35,822,232
=================
During the six months ended June 30, 2010 the Company using the Black-Scholes
model recorded $19,571 ($11,890 in 2009) of compensation expense, relating to
the vesting of stock warrants previously issued to non-employees for services.
The non cash warrant expense is allocated with $19,571 ($10,082 in 2009) to
general and administrative expenses and $-0- ($1,808 in 2009) to research and
development.
The estimated fair value of warrants issued to non-employees during the six
months ended June 30, 2010 ranged from $0.0053 to $0.0121. Assumptions used to
value the warrants: expected dividend yield Nil%; expected volatility of 130.65%
and 129.52%; risk-free interest rate of 3.08%, 3.05%, 3.28%, 3.12%, 2.75% and
2.42% and an expected life of 7 years.
OTHER INCOME (EXPENSE) AND INCOME TAX
Three Months Ended June 30 Six Months Ended June 30
------------------------------------------- ----------------------------------------------
Percentage Percentage
Increase Increase
2010 2009 (Decrease) 2010 2009 (Decrease)
------------------------------------------- ----------------------------------------------
Gain on Extinguishment
of debt
-- $70,510 100% -- $70,510 100%
----------------------------- --------------------------------
OTHER EXPENSES
Interest Expense ($6,488) ($13,761) (529%) ($23,125) ($23,060) (0.28%)
Amortization of Discount
on Convertible Notes ($11,287) ($2,884) 291% ($16,021) ($2,884) 456%
Income Tax Expense -- -- -- ($1,600) ($1,600) Nil
-------------------------------------------------------------------------------------------
Total Other Expenses ($17,775) ($16,645) 7% ($40,746) ($27,544) 48%
-------------------------------------------------------------------------------------------
Other Income and Expenses ($17,775) ($53,865) (67%) ($40,746) $42,966 (195%)
===========================================================================================
26
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. For the quarter ended June 30, 2009, the Company
recorded a gain of $70,510 related to debt relief.
The Company had other expenses for the three and six months ended June 30, 2010
of $17,775 and $40,746 compared to $16,645 and $27,544 respectively in 2009. As
indicated above, the increase resulted from an increase in the amortization of
discounts on convertible notes and value of detachable warrants and related debt
conversion expenses.
NET LOSS
Our net loss for the quarter ended June 30, 2010 decreased to $82,023 from net
loss of $180,813 for the quarter ended June 30, 2009, representing a decrease of
55%. The decrease is directly related to the $140,000 write off of an accrued
liability that is no longer applicable. Without this write off the loss would
have increased by 23 % due to non cash consultant warrant expense and the
amortization of discounts on convertible notes and value of detachable warrants
and for related debt conversion expenses.
FINANCIAL CONDITION
CASH AND WORKING CAPITAL
-------------------------------------------------------
June 30, 2010 December 31, 2009 Percentage
Increase/(Decrease)
-------------------------------------------------------
Current Assets $54 $3,037 (98%)
Current Liabilities ($8,492,198) ($8,584,668) (1%)
-------------------------------------------------------
Working Capital Deficit ($8,492,144) ($8,581,631) (1%)
=======================================================
The increase to our working capital deficit was primarily attributable to an
increase in accounts payable and an increase in provision for lawsuit
settlements as discussed below.
LIABILITIES
------------------------------------------------------
June 30, 2010 December 31, 2009 Percentage
Increase/(Decrease)
------------------------------------------------------
Provisions for Lawsuit
Settlements $5,943,463 $5,731,145 4%
Accounts Payable $2,074,909 $2,002,746 4%
Accrued Liabilities $202,000 $300,000 (33%)
Short-Term Loans $271,826 $550,777 (51%)
The increase in provision for lawsuits is the accrued interest relating to the
TST, Inc. settlement which is payable only upon bankruptcy of the Company.
Accounts payable increased due to a lack of funds to pay creditors. Short-term
loans decreased due to conversion of notes into the Company's common stock.
Accrued liabilities decreased due to a $140,000 write off of an accrued
liability that is no longer applicable.
27
We continue to negotiate with our creditors for the payment of our accounts
payable and accrued liabilities. Payment of these liabilities is contingent on
new funding being received that would enable us to make payments to the
creditors. Our ability to continue our operations may also be conditional upon
the forbearance of our creditors.
Included in short-term loans at June 30, 2010 are unsecured, non-interest
bearing advances of $138,600 that we anticipate will be converted into shares of
our common stock.
CASH FLOWS
-----------------------
At June 30
-----------------------
2010 2009
---- ----
Net Cash provided by (used in) Operating Activities ($47,983) ($120,947)
Net Cash provided by (used in) Financing Activities $45,000 $150,000
Net Increase (Decrease) in Cash During Period ($2,983) $29,053
CASH USED IN OPERATING ACTIVITIES
The decrease in cash used in operating activities was due to the limited amount
of funds available compared to 2009.
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
2010 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. 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
In accordance with the provisions of ASC Topic 718, Compensation--Stock
Compensation, which 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.
NEW ACCOUNTING PRONOUNCEMENTS
In April 2010, the FASB issued Accounting Standards Update 2010-13,
COMPENSATION--STOCK COMPENSATION (TOPIC 718): EFFECT OF DENOMINATING THE
EXERCISE PRICE OF A SHARE-BASED PAYMENT AWARD IN THE CURRENCY OF THE MARKET IN
WHICH THE UNDERLYING EQUITY SECURITY TRADES. ASU 2010-13 updates ASC 718 to
codify the consensus reached in EITF Issue No. 09-J, EFFECT OF DENOMINATING THE
EXERCISE PRICE OF A SHARE-BASED PAYMENT AWARD IN THE CURRENCY OF THE MARKET IN
WHICH THE UNDERLYING EQUITY SECURITY TRADES. The ASU clarifies that share-based
payment awards with an exercise price denominated in the currency of a market in
which a substantial portion of the underlying equity security trades should not
be considered to meet the criteria requiring classification as a liability. The
updated guidance is effective for fiscal years, and interim periods within those
fiscal years, beginning on or after December 15, 2010. Early adoption is
permitted. The provisions of ASU 2010-13 is not expected to have an impact on
the Company's financial statements.
In February 2010, the FASB issued Accounting Standards Update 2010-09,
SUBSEQUENT EVENTS (TOPIC 855): AMENDMENTS TO CERTAIN RECOGNITION AND DISCLOSURE
REQUIREMENTS. ASU 2010-09 removes the requirement for an SEC filer to disclose a
date through which subsequent events have been evaluated in both issued and
revised financial statements. Revised financial statements include financial
statements revised as a result of either correction of an error or retrospective
application of U.S. GAAP. The FASB also clarified that if the financial
statements have been revised, then an entity that is not an SEC filer should
disclose both the date that the financial statements were issued or available to
be issued and the date the revised financial statements were issued or available
to be issued. The FASB believes these amendments remove potential conflicts with
the SEC's literature. In addition, the amendments in the ASU requires an entity
that is a conduit bond obligor for conduit debt securities that are traded in a
public market to evaluate subsequent events through the date of issuance of its
financial statements and must disclose such date. All of the amendments in the
ASU were effective upon issuance (February 24, 2010) except for the use of the
issued date for conduit debt obligors. That amendment is effective for interim
or annual periods ending after June 15, 2010. The provisions of ASU 2010-09 did
not have a material impact on the Company's financial statements.
29
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 December 31, 2009. 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 a material weakness 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.
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.
30
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
NONE
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
During the quarter ended June 30, 2010 $100,000 of principal of the following
notes were converted into 54,000,000 shares of our common stock. 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. Each unit consisted of
a $100,000, 12% convertible note and warrants to purchase 2,000,000 of our
shares at $0.01. The two year note is convertible at any time prior to payment.
The conversion price was ($.01). 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.
During the quarter ended June 30, 2010 $220,000 of principal of the following
notes were converted into 22,352,328 shares of our common stock. 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. 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 2,000,000 warrants were
converted at a reduced conversion price of $0.005. 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 5. OTHER INFORMATION
None
31
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.
32
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 19, 2010
- ---------------- Director
Jason Meyers
/s/ Debi Kokinos Chief Financial Officer August 19, 2010
- ---------------- and Chief Accounting Officer
Debi Kokinos
33