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| Share Name | Share Symbol | Market | Type |
|---|---|---|---|
| Turbodyne Technologies Inc (CE) | USOTC:TRBD | OTCMarkets | Common Stock |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.00 | 0.00% | 0.000001 | 0.00 | 01:00:00 |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended MARCH 31, 2008
[ ] Transition Report pursuant to 13 or 15(d) of the Securities Exchange Act
of 1934 For the transition period to ---------------- ------------------- |
Commission File Number 000-21391
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 -------------- |
Check whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the issuer was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days Yes [ ] No [ X ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer' and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer |_| Accelerated filer |_| Non -accelerated filer |_| Smaller reporting company |X| (do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act) |_| Yes |X| No
State the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 434,582,628 shares of common stock issued and outstanding as of May 14, 2008.
Transitional Small Business Disclosure Format (check one): Yes [ ] NO [X]
TURBODYNE TECHNOLOGIES, INC.
INDEX TO FORM 10-Q
MARCH 31, 2008 PAGE NUMBER PART I - FINANCIAL INFORMATION Item 1. Financial Statements: Consolidated Balance Sheets as of March 31, 2008 and December 31, 2007 4 Consolidated Statements of Operations for the three month periods ended March 31, 2008 and March 31, 2007 5 Consolidated Statements of Cash Flows for the three month periods ended March 31, 2008 and March 31, 2007 6 Notes to the Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis or Plan of Operations 21 Item 3. Quantitative and Qualitative Disclosures About Market Risk 30 Item 4. Controls and Procedures 31 PART II - OTHER INFORMATION Item 1. Legal Proceedings 32 Item 1A. Risk Factors N/A Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 32 Item 3. Defaults Upon Senior Securities N/A Item 4. Submission of Matters to a Vote of Security Holders N/A Item 5. Other Information N/A Item 6. Exhibits 32 SIGNATURES 33 |
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE-MONTH PERIODS ENDED
MARCH 31, 2008 AND 2007
(UNAUDITED - EXPRESSED IN US DOLLARS)
------------------------------------------------------------------------------------------------- TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (EXPRESSED IN US DOLLARS) MARCH 31 DECEMBER 31 2008 2007 ------------------------------------------------------------------------------------------------- ASSETS (UNAUDITED) CURRENT Cash $ 54 $ 2,786 Prepaid expenses and other current assets 672 672 ------------------------------ TOTAL CURRENT ASSETS 726 3,458 PROPERTY AND EQUIPMENT, net 8,623 9,513 ------------------------------ TOTAL ASSETS $ 9,349 $ 12,971 ================================================================================================= LIABILITIES AND STOCKHOLDERS' DEFICIT LIABILITIES CURRENT Accounts payable $ 2,111,638 2,132,439 Accrued liabilities 322,167 292,000 Provision for lawsuit settlements (Note 5) 5,073,932 4,994,173 Loans payable (Note 4) 1,148,920 1,200,973 ------------------------------ TOTAL CURRENT LIABILITIES 8,656,657 8,619,585 DEFERRED LICENSING FEE 291,498 297,054 ------------------------------ TOTAL LIABILITIES 8,948,155 8,916,639 ------------------------------ STOCKHOLDERS' DEFICIT Share Capital (Note 3) Authorized 1,000,000 preferred shares, par value $0.001 1,000,000,000 common shares, par value $0.001 Issued 12,675 preferred shares 12 12 434,582,628 common shares in 2008 (2007 - 380,459,434) 434,583 380,460 Treasury stock, at cost (5,278,580 shares) (1,963,612) (1,963,612) Additional paid-in capital 125,876,613 124,831,388 Other comprehensive income - Foreign exchange translation gain 35,119 35,119 Accumulated deficit (133,321,521) (132,187,035) ------------------------------ TOTAL STOCKHOLDERS' DEFICIT (8,938,806) (8,903,668) ------------------------------ TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 9,349 $ 12,971 ================================================================================================= The accompanying notes are an integral part of these unaudited consolidated financial statements. |
------------------------------------------------------------------------------------------ TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED - EXPRESSED IN US DOLLARS) FOR THE THREE-MONTH PERIODS ENDED MARCH 31 2008 2007 ------------------------------------------------------------------------------------------ (AS RESTATED) ------------------------------------------------------------------------------------------ LICENSING FEES $ 5,556 $ 5,556 ------------------------------ EXPENSES Selling, general and administrative 255,848 235,040 Research and development costs 110,558 80,941 Litigation expense 82,065 79,759 Depreciation and amortization 890 537 ------------------------------ TOTAL EXPENSES 449,361 396,277 ------------------------------ LOSS FROM OPERATIONS (443,805) (390,721) OTHER INCOME (EXPENSE) Interest expense (22,030) (8,990) Amortization of discount on convertible notes (Note 4) (240,194) (155,902) Debt conversion expense (Note 4) (426,857) (422,400) Gain on extinguishment of debt -- 122,050 ------------------------------ NET LOSS BEFORE TAXES (1,132,886) (855,963) Income tax expense (1,600) -- ------------------------------ NET LOSS FOR THE PERIOD $ (1,134,486) $ (855,963) ========================================================================================== NET LOSS PER COMMON SHARE - BASIC AND DILUTED $ (0.00) $ (0.00) ========================================================================================== WEIGHTED AVERAGE SHARES - BASIC AND DILUTED 383,241,566 349,272,133 ========================================================================================== The accompanying notes are an integral part of these unaudited consolidated financial statements. |
----------------------------------------------------------------------------------------- TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED - EXPRESSED IN US DOLLARS) FOR THE THREE-MONTH PERIODS ENDED MARCH 31 2008 2007 ----------------------------------------------------------------------------------------- (AS RESTATED) ----------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net loss for the period $(1,134,486) $(855,963) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Amortization of deferred licensing fees (5,556) (5,556) Depreciation and amortization 890 537 Gain on extinguishment of debt -- (122,050) Amortization of discount on convertible debt (Note 4) 240,194 155,902 Stock for services 180,000 -- Debt conversion expense (Note 4) 426,857 422,400 Warrant compensation (Note 3) 54,600 87,405 (Increase) decrease in operating assets Prepaid expenses and other current assets -- -- Increase (decrease) in operating liabilities Accounts payable (20,801) (28,210) Accrued liabilities and provision for lawsuit settlements 132,070 64,349 ---------------------- Net cash used in operating activities (126,232) (281,186) ---------------------- FINANCING ACTIVITIES Notes Payable 123,500 356,000 ---------------------- Net cash provided by financing activities 123,500 356,000 ---------------------- NET INCREASE (DECREASE) IN CASH (2,732) 74,814 CASH, beginning of period 2,786 14,745 ---------------------- CASH, end of period $ 54 $ 89,559 ========================================================================================= SUPPLEMENTARY DISCLOSURE OF NON-CASH INFORMATION BENEFICIAL CONVERSION FEATURE OF CONVERTIBLE DEBT $ 54,198 $ 220,587 Value of warrants issued with convertible debt 24,198 79,896 Conversion of interest and notes payable to common stocks 359,494 60,000 ========================================================================================= The accompanying notes are an integral part of these unaudited consolidated financial statements. |
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited - Expressed in US Dollars)
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Turbodyne Technologies, Inc., a Nevada corporation, and its subsidiaries (the "Company") engineer, develop and market products designed to enhance performance and reduce emissions of internal combustion engines.
The Company's operations have been financed principally through a combination of private and public sales of equity and debt securities. If the Company is unable to raise equity capital or generate revenue to meet its working capital needs, it may have to cease operating and seek relief under appropriate statutes. These consolidated financial statements have been prepared on the basis that the Company will be able to continue as a going concern and realize its assets and satisfy its liabilities and commitments in the normal course of business and do not reflect any adjustment which would be necessary if the Company is unable to continue as a going concern.
BASIS OF PRESENTATION
The interim financial statements included herein, presented in accordance with United States generally accepted accounting principles and stated in US dollars, have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission and with the instruction to Form 10 and Rule 8-03 of Regulation S-X. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading.
These financial statements reflect all adjustments, consisting of normal recurring adjustments, which in the opinion of management are necessary for fair presentation of the information contained therein. It is suggested that these interim financial statements be read in conjunction with the audited financial statements of the Company for the years ended December 31, 2007 and 2006 included in the Company's 10-KSB Annual Report. The Company follows the same accounting policies in the preparation of interim reports.
Results of operations for the interim periods are not indicative of annual results.
GOING CONCERN
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company has suffered net operating losses in recent periods, has an accumulated deficit of $133,321,521 at March 31, 2008 and a total capital deficit of $8,938,806 at March 31, 2008. It has used most of its available cash in its operating activities in recent years, has a significant working capital deficiency and is subject to lawsuits brought against it by other parties. These matters raise substantial doubt about the Company's ability to continue as a going concern.
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited - Expressed in US Dollars)
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements, stated in United States dollars, include the accounts of Turbodyne Technologies, Inc. and its wholly owned subsidiaries, Turbodyne Systems, Inc., Turbodyne Germany Ltd., Electronic Boosting Systems, Inc. and Pacific Baja Light Metals Corp. ("Pacific Baja"). All intercompany accounts and transactions have been eliminated on consolidation.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization of property and equipment is computed using the straight-line method over estimated useful lives as follows:
Machinery and equipment - 7 to 15 years Furniture and fixtures - 5 to 10 years
LICENSES
Licenses are recorded at cost and are amortized over the estimated useful life of 18 years.
VALUATION OF LONG-LIVED ASSETS
The Company periodically reviews the carrying value of long-lived assets for indications of impairment in value and recognizes impairment of long-lived assets in the event the net book value of such assets exceeds the estimated undiscounted future cash flows attributable to such assets. Long-lived assets to be disposed of by sale are to be measured at the lower of carrying amount or fair value less cost of sale whether reported in continuing operations or in discontinued operations. No impairment was required to be recognized during 2008 and 2007.
RECOGNITION OF REVENUE
License fee revenue is recognized over the term of the license agreement. During the year ended December 31, 2003, $400,000 in license fees were deferred and are being amortized over 18 years. As a result, for the quarter ended March 31, 2008 $5,556 ($5,556 in 2007) of licensing fees was recognized as income.
EARNINGS (LOSS) PER SHARE
Earnings (loss) per share is computed in accordance with SFAS No. 128, "Earnings Per Share". Basic earnings (loss) per share is calculated by dividing the net income (loss) available to common stockholders by the weighted average number of shares outstanding during the period. Diluted earnings per share reflects the potential dilution of securities that could share in earnings of an entity. In a loss period, dilutive common equivalent shares are excluded from the loss per share calculation as the effect would be anti-dilutive.
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited - Expressed in US Dollars)
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Fair Value of Financial Instruments
The fair values of the Company's cash, term debts, accounts payable, accrued liabilities and loans payable approximate their carrying values because of the short-term maturities of these instruments.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation under the fair value method in accordance with Statement of Financial Accounting Standards No. 123 (revised 2004), "Share Based Payment" "SFAS 123(R)".
RESEARCH AND DEVELOPMENT
Research and development costs related to present and future products have been charged to operations in the period incurred.
INCOME TAXES
The Company accounts for income taxes under the asset and liability method of accounting for income taxes, which recognizes deferred tax assets and liabilities for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
LEGAL FEES
The Company expenses legal fees in connection with litigation as incurred.
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited - Expressed in US Dollars)
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
COMPREHENSIVE INCOME
The Company has adopted SFAS No. 130, "Reporting Comprehensive Income". SFAS
No. 130 establishes standards to measure all changes in equity that result
from transactions and other economic events other than transactions with
owners. Comprehensive income is the total of net earnings (loss) and all
other non-owner changes in equity. Except for net earnings (loss) and foreign
currency translation adjustments, the Company does not have any transactions
and other economic events that qualify as comprehensive income as defined
under SFAS No. 130. As foreign currency translation adjustments were
immaterial to the Company's consolidated financial statements, net earnings
(loss) approximated comprehensive income for the quarter ended March 31, 2008
and 2007.
NEW ACCOUNTING PRONOUNCEMENTS
In September 2006, the FASB issued Statement No. 158, "Employer's Accounting for Defined Benefit Pension and Other Postretirement Plans - an amendment of FASB Statements No. 87, 88, 106, and 132(R)" ("SFAS 158"). This statement requires the full recognition, as an asset or liability, of the overfunded or underfunded status of a company-sponsored postretirement benefit plan. Adoption of this statement is required effective for the Company's fiscal year ending December 31, 2007. The adoption of SFAS 158 has not had a material effect on the Company as it has no defined benefit plans
In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard No. 157, "Fair Value Measurements" ("SFAS 157"), which defines the fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS 157 was effective for the Company on January 1, 2008. The Company plans to adopt the provisions of SFAS No. 157 on July 1, 2008 and is currently assessing the impact of the adoption of SFAS No. 157 on its results of operations and financial condition.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities" ("SFAS 159") which permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. SFAS 159 was effective for the Company on January 1, 2008. The Company plans to adopt the provisions SFAS No. 159 on July 1, 2008 and is currently assessing the impact of the adoption of SFAS No. 159 on its results of operations and financial condition.
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited - Expressed in US Dollars)
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
NEW ACCOUNTING PRONOUNCEMENTS - CONTINUED
In December 2007, the FASB issued SFAS No. 141R, "Business Combinations" ("SFAS 141R"). SFAS 141R revises the principles and requirements for how the acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non controlling interest in the acquiree, and the goodwill acquired in a business combination or gain from a bargain purchase. SFAS 141R also revises the principles and requirements for how the acquirer determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. This pronouncement will be effective for the Company on January 1, 2009. The Company is currently evaluating the impact, if any, that SFAS 141R will have on its financial position or results of operations.
Also in December 2007, the FASB issued SFAS No. 160, "Non controlling Interest in Consolidated Financial Statements -- an amendment of ARB No. 51" ("SFAS 160"). SFAS 160 amends ARB No. 51 to establish accounting and reporting standards for the non controlling interest in a subsidiary and for the deconsolidation of a subsidiary. This pronouncement will be effective for the Company on January 1, 2009. The Company is currently evaluating the impact, if any, that SFAS 160 will have on its financial position or results of operations.
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS No. 161"). SFAS 161 requires companies with derivative instruments to disclose information that should enable financial-statement users to understand how and why a company uses derivative instruments, how derivative instruments and related hedged items are accounted for under FASB Statement No. 133 "Accounting for Derivative Instruments and Hedging Activities" and how derivative instruments and related hedged items affect a company's financial position, financial performance and cash flows. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. We are currently evaluating the impact, if any, that SFAS 161 will have on our financial position or results of operations.
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited - Expressed in US Dollars)
The Company is restating its previously issued March 31, 2007 consolidated financial statements for the following reasons: unrecorded beneficial conversion feature of convertible debt and related amortization, unrecorded value of detachable warrants issued with the convertible debt and related amortization, unrecorded inducement expense as a result of Company's modification of conversion terms and terms for the exercise of warrants to induce conversion of debt and warrants exercise.
Previously Reported Restated Restated (Original and Increase (Amendment Increase (Amendment Amendment No. 1) (Decrease) No. 2) (Decrease) No. 3) TOTAL ASSETS $ 90,231 $ -- $ 90,231 $ -- $ 90,231 Loans payable 995,094 (378,210) 616,884 (95,922) 520,962 Total Current Liabilities 8,321,940 (378,210) 7,943,730 (95,922) 7,847,808 TOTAL LIABILITIES 8,635,662 (378,210) 8,257,452 (95,922) 8,161,530 Additional paid in capital 121,815,108 1,199,983 123,015,091 406,178 123,421,269 Accumulated deficit (128,789,376) (821,772) (129,611,148) (310,256) (129,921,404) TOTAL CAPITAL DEFICIT (8,545,431) 378,210 (8,167,221) 95,922 (8,071,299) STATEMENT OF OPERATIONS Amortization of convertible notes discount relating to - Beneficial conversion feature* 166,857 255,543 422,400 -- 422,400 Warrants 85,773 -- 85,773 70,129 155,902 NET LOSS (637,459) (148,374) (785,834) (70,129) (855,963) |
*THE COMPANY DID NOT INITIALLY RECOGNIZE THE MATERIAL MODIFICATION OF CONVERSION TERMS AS AN EXTINGUISHMENT OF DEBT, RESULTING IN FAILURE TO WRITE OFF UNAMORTIZED PORTION OF DEBT DISCOUNT RELATING TO THIS EXTINGUISHED DEBT.
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited - Expressed in US Dollars)
3. SHARE CAPITAL
Transactions not disclosed elsewhere in these consolidated interim financial statements are as follows:
a) Authorized Capital
At the Annual General Meeting held on June 30, 2004, the shareholders approved an increase of authorized capital to 1,000,000,000 common shares.
In 2003, 150,000 of the 1 million preferred shares were designated as Series X preferred shares. These shares have a par value of $0.001 per share with each share being convertible into 100 common shares at the discretion of the holder. As of March 31, 2008, 12,675 of Series X preferred shares convertible into 1,267,500 common shares are outstanding.
In addition to outstanding shares of common stock, options and warrants described in these notes; additional shares are issuable in connection with the change of control transaction in September 2005 in the event the Company issues any securities directly or indirectly related to pre-merger events.
b) During the three months ended March 31, 2008 the Company issued 54,123,194 shares of common stock, 48,123,194 for conversion of notes and interest payable and 6,000,000 for payment of services. During the three months ended March 31, 2007, the Company issued 12,000,000 shares of common stock for conversion of notes payable.
c) Stock Options
The determination of fair value of share-based payment awards to employees, directors and non-employees on the date of grant using the Black-Scholes model is affected by the Company's stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to the expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise behaviors. Management has used historical data to estimate forfeitures. The risk-free rate is based on U.S. Treasury rates in effect during the corresponding period of grant. The expected volatility is based on the historical volatility of the Company's stock price.
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited - Expressed in US Dollars)
3. SHARE CAPITAL - CONTINUED
GRANT OF STOCK OPTIONS TO NON-EMPLOYEES FOR SERVICES
During 2006 and 2007, we granted warrants to purchase 78,200,000 shares of our common stock to various consultants that we deemed essential to our operations. Of these warrants, 2,169,444 were vested and reflected as an expense for the three months ended March 31, 2008.
During the three months ended March 31, 2008 the Company recorded $54,600 ($87,405 in 2007) of compensation expense relating to stock warrants issued to non-employees for services rendered during the period.
The estimated fair value of warrants issued to non-employees during the three months ended March 31, 2008 ranged from $0.0214 to $0.0294. Assumptions used to value the warrants: expected dividend yield Nil%; expected volatility of 101.36% and 157.41%; risk-free interest rate of 2.88%, 2.96% and 3.19% and an expected life of 7 years.
d) Stock Purchase Warrants
At March 31, 2008 the Company had 35,461,664 share purchase warrants outstanding and exercisable. These warrants were issued in connection with private placements, non-employee compensation and other means of financing. The holders of these warrants are entitled to receive one share of common stock of the Company for one warrant exercised. The warrants have exercise prices ranging from $0.0117 to $0.04 per share with a weighted average exercise price of $0.016 per share and expiration dates between 2011 and 2015. Details of share purchase warrants for the quarter ended March 31, 2008 are as follows:
2008 INVESTORS EMPLOYEES & CONSULTANTS TOTAL ------------------------------------------------------------------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE WARRANTS PRICE WARRANTS PRICE WARRANTS PRICE ---------- ----------- ------------- ------------ ------------ -------------- Outstanding at beginning 15,120,000 $ 0.02 16,172,220 $ 0.01 31,292,220 $ 0.02 of period Granted 2,000,000 $ 0.02 2,169,444 $ 0.01 4,169,444 $ 0.02 ---------- ---------- ---------- Warrants outstanding and exercisable at end of 17,120,000 $ 0.02 18,341,664 $ 0.01 35,461,664 $ 0.02 period ========== ========== ========== Weighted average fair value of warrants granted during $ 0.02 $ 0.01 $ 0.01 the period ================================================================================= |
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited - Expressed in US Dollars)
3. SHARE CAPITAL - CONTINUED
At March 31, 2008, the following is a summary of share purchase warrants outstanding and exercisable:
Weighted- Average Weighted Remaining Average Contractual Exercise Exercise Price Number Life (Years) Price ------------------- ----------------- ------------------------ ---------------- $0.01 17,508,336 6.07 $0.01 $0.025 - 0.04 17,953,328 4.29 0.02 ----------------- ------------------------ ---------------- 35,461,664 5.17 $0.02 ================= ------------------------------------------------------------------------------- |
4. LOANS PAYABLE
March 31, December 31, 2008 2007 ------------ ------------ Unsecured, non-interest bearing loan payable, due on demand from stockholders and other parties $ 138,600 $ 138,600 Note payable, 5% per annum 49,179 46,000 Note payable, 18% per annum 56,800 33,300 Convertible notes payable net of unamortized discount of $67,023 and $24,406 and warrant valuation of $199,726 and $53,501 in 2008 and 2007, respectively** 904,341 983,073 ---------- ---------- Total Loans Payable $1,148,920 $1,200,973 ========== ========== |
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited - Expressed in US Dollars)
4. LOANS PAYABLE - CONTINUED
As of March 31, 2008, convertible notes consist of:
Issued Issued Issued Issued through from from From September Nov 06 to March 07 to Sep 07 to 2006 Feb 07 Aug 07 Mar 08 Total -------------- --------------- -------------- -------------- -------------- Proceeds from issuances of convertible debt $ 615,000 $ 95,000 $ 441,000 $ 300,000 $ 1,451,000 Less: Debt conversions (380,000) -- (150,000) -- (530,000) ------------ ------------ ------------ ------------ ------------ 235,000 95,000 291,000 300,000 921,000 ------------ ------------ ------------ ------------ ------------ Discount on convertible debt Value allocated to warrants 88,144 8,041 118,485 75,233 289,903 Beneficial conversion feature 521,756 86,959 322,515 203,163 1,134,393 ------------ ------------ ------------ ------------ ------------ 609,900 95,000 441,000 278,396 1,424,296 Accumulated amortization of value allocated to warrants (88,144) (8,041) (112,896) (56,416) (265,497) Accumulated amortization of beneficial conversion feature (512,429) (86,959) (306,809) (161,173) (1,067,370) ------------ ------------ ------------ ------------ ------------ 9,327 -- 21,295 60,807 91,429 Accrued Interest 35,553 5,790 19,130 14,297 74,770 ------------ ------------ ------------ ------------ ------------ Net Convertible Debt $ 261,226 $ 100,790 $ 288,835 $ 253,490 $ 904,341 ============ ============ ============ ============ ============ Lower of 70% of Original conversion price market or $ 0.005 $ 0.020 $ 0.020 -- $0.025 Modified conversion price $ 0.005 N/A N/A N/A -- Interest rate 5% 5% 5% 18% -- Maturity from date of issuance 1 year 1 year 1 year 6 months -- Warrants issued 12,300,000 1,900,000 8,820,000 6,000,000 29,020,000 Warrants exercised (11,900,000) -- -- -- (11,900,000) ------------ ------------ ------------ ------------ ------------ Warrants remaining 400,000 1,900,000 8,820,000 6,000,000 17,120,000 ------------ ------------ ------------ ------------ ------------ Market value of warrants at date of issuance $ 150,884 $ 48,863 $ 398,872 $ 182,111 $ 780,730 Assumptions for Black-Scholes valuation of warrants Original exercise price $ 0.025 $ 0.025 $ 0.020 $ 0.020 Modified exercise price $ 0.010 N/A N/A N/A Term 5 years 5 years 5 years 5 years Volatility rate 146% - 151% 153% - 155% 112% - 155% 109% - 155% Risk free interest rate 4.61% - 5.02% 4.45% - 4.69% 4.46% - 5.01% 2.93% - 5.01% |
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited - Expressed in US Dollars)
For the years ended December 31, 2007 and 2006, the Company issued $691,000 and $660,000, respectively, of convertible notes. For the three months ending March 31, 2008 the Company issued $100,000 of convertible notes. All of the convertible notes were issued with detachable warrants to purchase 13,820,000, 13,200,000 and 2,000,000 shares of the Company's common stock, respectively, at $0.025 per share. In recording the transaction, the Company allocated the value of the proceeds to the convertible notes and the warrants based on their relative fair values. Fair value of the warrants was determined using the Black-Scholes valuation model. It was also determined that the convertible notes contained a beneficial conversion feature since the fair market value of the common stock issuable upon the conversion of the notes exceeded the value allocated to the notes.
The value of the beneficial conversion feature and the value of the warrants have been recorded as a discount to convertible notes and are being amortized over the term of the notes using the straight-line method. For the years ended December 31, 2007 and 2006, amortization of the discount was $864,485 and $568,168, respectively. For the three months ending March 31, 2008 the amortization of the discount was $240,194.
In September 2006, the Company offered to decrease the note conversion price to $0.005 per share if the note holders exercised their warrants at the reduced exercise price of $0.01 by September 30, 2006. In consideration for the reduction of conversion price, the maturity of the notes extended for another year. As a result of the inducement to exercise the warrants and to convert the notes, the Company recognized an expense of $988,686 and $345,357 for the years ended December 31, 2007 and 2006, respectively, with a corresponding increase in additional paid-in capital. For the three months ending March 31, 2008 the Company recognized an expense of $426,857.
Prior to the three months ended March 31, 2008, 11,900,000 of the warrants have been exercised.
The modification of conversion terms was substantial such that it was considered an extinguishment of debt. Accordingly, the unamortized discount on convertible notes was written off and included in total amortization for 2006. Conversion of notes in 2007 and 2006 also resulted in the write off of the corresponding unamortized discount.
In February 2007, the Company changed the per share conversion price from $0.005 to $0.02 for new lenders. The notes, issued prior to September 1, 2007, bear interest at 5% and mature within one year from date of issuance. The notes, issued after September 1, 2007, bear interest at 18% and mature within six months from date of issuance. The warrants are to purchase the Company's common stock at $0.025 per share expiring in five years.
For the year ended December 31, 2007, the Company recognized $864,485 in interest expense related to the amortization of the value of the detachable warrants and beneficial conversion feature recorded on these convertible notes. As of March 31, 2008, the remaining balance of the beneficial conversion feature was $67,023 and detachable warrants were $24,406.
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited - Expressed in US Dollars)
5.COMMITMENTS AND CONTINGENCIES
The Company is party to various legal claims and lawsuits that have arisen in the normal course of business. There have been no material changes in the status of these matters since the issuance of the most recent audited annual financial statements.
LITIGATION
a) TST, Inc.
In March 2000, TST, Inc. ("TST"), a vendor to a subsidiary of Pacific Baja (Note 4(b)) filed an action against the Company alleging that in order to induce TST to extend credit to a subsidiary of Pacific Baja, the Company executed guarantees in favor of TST. TST alleged that the subsidiary defaulted on the credit facility and that the Company is liable as guarantor. Agreed to the immediate entry of judgment against the Company in the amount of $2,068,078 plus interest from the date of entry at the rate of 10% per annum. The amount of this judgment would immediately increase by any amount that TST is compelled by judgment or court order or settlement to return as a preferential transfer in connection with the bankruptcy proceedings of Pacific Baja; and TST cannot execute on its judgment until Turbodyne either: (a) files a voluntary bankruptcy case; (b) is the subject of an involuntary case; or (c) effects an assignment for the benefit of creditors.
Any proceeds received by TST or its president from the sale of the issued shares will be automatically applied as a credit against the amount of the judgment against the Company in favor of TST. Prior to March 31, 2004, 147,000 shares issued in connection with the TST settlement had been sold which have reduced the provision for lawsuit settlement by $23,345.
At March 31, 2008, the Company has included $3,672,147 ($3,592,387 in 2007) in regard to this matter in provision for lawsuit settlements. It was determined that TST received payment in preference to other creditors before Pacific Baja filed its Chapter 11 petition in bankruptcy. TST and Pacific Baja settled the preference payment issue with TST paying $20,000 to Pacific Baja and TST relinquishing the right to receive $63,000 therefore; $83,000 has also been included in the provision for lawsuit settlements.
----------- ----------- March 31, 2008 December 31, 2007 ----------- ----------- Settlement amount $ 2,068,079 $ 2,068,079 $ 1,544,413 $ 1,464,653 Interest $ 83,000 $ 83,000 Preference payment ($ 23,345) ($ 23,345) Proceeds of stock sale ----------- ----------- Total $ 3,672,147 $ 3,592,387 =========== =========== |
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited - Expressed in US Dollars)
5. COMMITMENTS AND CONTINGENCIES - LITIGATION CONTINUED
b) Pacific Baja Bankruptcy
In July 1999, a major creditor of the Company's wholly-owned major
subsidiary, Pacific Baja, began collection activities against
Pacific Baja which threatened Pacific Baja's banking relationship
with, and source of financing from, Wells Fargo Bank. As a result,
Pacific Baja and its subsidiaries commenced Chapter 11 bankruptcy
proceedings on September 30, 1999
.
In September 2001, the Pacific Baja Liquidating Trust (the "Trust")
commenced action against us in the aforesaid Bankruptcy Court. The
Trust was established under the Pacific Baja bankruptcy proceedings
for the benefit of the unsecured creditors of Pacific Baja.
The Company vigorously contested the Complaint until April 22, 2005
when the Company entered into a stipulation for entry of judgment
and assignment in the Pacific Baja bankruptcy proceedings for
$500,000 to be issued in common stock or cash or a combination.
Additionally the Company assigned to the bankruptcy Trust the rights
to $9,500,000 claims under any applicable directors and officers
liability insurance policies. The bankruptcy Trust also agreed to a
covenant not to execute against the Company regardless of the
outcome of the insurance claims.
The Company has completed the assignment of its insurance claims, but has not completed the cash/stock payment that was to be paid to the Trust by December 9, 2005. We are negotiating with the Trustee regarding this default.
c) Former Officer
On May 20, 2004, one of the Company's former officers, Mr. Peter Hofbauer, filed a motion against the Company alleging that the Company failed to pay him the sum of $369,266 pursuant to the terms of a purported settlement agreement, allegedly made for the purposes of settling amounts owed to the former officer for services to the Company. On August 3, 2004 a writ of attachment was applied to the Company's Certificate of Deposit for $315,000. On October 25, 2004 the former officer and the Company signed and filed with the court a Stipulation re: Settlement and Order. The stipulation ordered the Company to deliver 4,000,000 shares of common stock without restrictions to be used by the former officer to raise funds to settle amounts owed to him by the Company. As funds are raised to settle amounts owed, writs will be reversed from the Certificate of Deposit. During 2004 the Company issued the 4,000,000 shares. Mr. Hofbauer sold 2,600,000 shares and released $125,000 of the Certificate of Deposit. On June 7, 2005 Mr. Hofbauer claimed the remaining $210,496 in the Certificate of Deposit. The remaining 1,400,000 shares were returned to the Company in October 2006.
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited - Expressed in US Dollars)
5. COMMITMENTS AND CONTINGENCIES - CONTINUED
d) Former Director
A former director of Turbodyne, Erwin Kramer (the "Plaintiff"), represented by his attorney Claus Schmidt, a former attorney of Turbodyne at the time of the alleged claim, filed a legal action in Germany against Turbodyne, our non-operating subsidiary Turbodyne Europe GmbH ("Turbodyne GmbH"), and ex-employees of Turbodyne GmbH, Peter Kitzinski and Marcus Kumbrick (collectively the "Defendants"), with the Regional Frankfurt court (the "German Court") in September, 2004. The Plaintiff claims damages of Euro 245,620 plus 5% interest per annum against the Defendants in respect of actions taken by the Defendants while employed with Turbodyne GmbH.
On September 9, 2004, the German Court, on a motion by the Defendants to the suit, dismissed the Plaintiff's claims against Peter Kitzinski and Marcus Kumbrick, and ordered that Turbodyne's patents in Munich be attached pending the resolution of the Plaintiff's claim against Turbodyne and Turbodyne GmbH. On June 13, 2005 the Court in Frankfurt dismissed the claim. The Plaintiff filed an appeal against this judgment with the Higher Regional Court in Frankfurt.
The Plaintiff's attorney, Claus Schmidt, also filed similar suits on behalf of Frank Walter and Herbert Taeuber. The German courts are indicating that all three suits need to be filed in the United States not Germany. Presently the suits have not been filed in the United States. We vigorously dispute this claim and have retained German counsel to defend it and seek its dismissal. At March 31, 2008, the Company has included $405,785 in regard to this matter in the provision for lawsuit settlements.
e) Crescent Fund, LLC
A former consultant has filed a complaint in Supreme Court of the State of New York for the County of New York for an action entitled CRESCENT FUND, LLC v TURBODYNE TECHNOLOGIES, INC. The action seeks $300,000 damages based upon claims for alleged breaches of contract and covenants of good faith and fair dealing. Plaintiff received a certificate for 5,000,000 shares of our common stock to perform investor relations services for us under a contract. The damages, it is claimed, arose because we failed to give plaintiff an opinion to sell the shares. It is the Company's position that plaintiff failed to perform any of the duties and obligations required of it under the aforesaid contract which was fraudulently induced. Therefore plaintiff is not entitled to retain the shares. The Company has filed an answer and counterclaim for the return of such shares and damages based upon plaintiff's breach and fraud. The Company does not anticipate a liability therefore has not included an amount in the provision for lawsuit settlements. Subsequent to year end the Company agreed to a nonmonetary settlement permitting the plaintiff to retain a majority of its shares but releasing the Company from all liability with any payments.
f) Other
The Company is currently involved in various collection claims and other legal actions. It is not possible at this time to predict the outcome of the legal actions.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
FORWARD LOOKING STATEMENTS
The information in this discussion contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. These
forward-looking statements involve risks and uncertainties, including statements
regarding the Company's capital needs, business strategy and expectations. Any
statements contained herein that are not statements of historical facts may be
deemed to be forward-looking statements. In some cases, you can identify
forward-looking statements by terminology such as "may", "will", "should",
"expect", "plan", "intend", "anticipate", "believe", "estimate", "predict",
"potential" or "continue", the negative of such terms or other comparable
terminology. Actual events or results may differ materially. In evaluating these
statements, you should consider various factors, including the risks outlined in
the Risk Factors section below, and, from time to time, in other reports the
Company files with the SEC. These factors may cause the Company's actual results
to differ materially from any forward-looking statement. The Company disclaims
any obligation to publicly update these statements, or disclose any difference
between its actual results and those reflected in these statements. The
information constitutes forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995.
As used in this Quarterly Report on Form 10-Q, the terms "we", "us", "our", "Turbodyne" and "our company" mean Turbodyne Technologies, Inc., unless otherwise indicated. All dollar amounts in this Quarterly Report on Form 10-Q are in U.S. dollars unless otherwise stated.
We are an engineering Company and have been engaged, for over ten years, in the design and development of forced-air induction (air-charging) technologies that improve the performance of gas and diesel internal combustion engines. Optimum performance of an internal combustion engine requires a proper ratio of fuel to air. Power available from the engine is reduced when a portion of the fuel is not used. In a wide range of gas and diesel engines additional air is needed to achieve an optimal result. Traditional engineered solutions for this problem use belts or exhaust gas (superchargers or turbochargers) to supply additional air to an engine. Turbodyne, instead, uses electric motors to supply additional air. Because an electric motor can be engaged more quickly, compared to the mechanical delays inherent in a belt or exhaust gas device, Turbodyne's products reduce this `turbolag' and otherwise adds to the effectiveness of gas and diesel engines used in automotive, heavy vehicle, marine, and other internal combustion installations.
Since September 2005 when it took office management has obtained some additional financing and has conducted limited business activity including:
o Updating our financial statements and required SEC filings
o Assessment of our technology including patents and other rights
o Limited development of our Turbopac(TM) and related product line
o Filing for protection of new intellectual properties related to our
products
o Review and negotiate to settle outstanding litigation and liabilities
o Formulating business and marketing plans
There is no assurance we will be able to obtain sufficient financing to implement full scale operations.
In February 2007 the Company filed a provisional application in the United States Patent and Trademark Office for a TurboPac related technology. Referred to as the 'TurboFlow', the patent disclosure includes application of the technology to vehicle types commonly referred to as 'hybrids' or 'low emission vehicles'. The disclosed technology applies advanced controls, energy management, and a TurboPac related technology to avoid problems encountered when using traditional turbo- or super- charging air injection units with a small engine in those types of vehicles.
Turbodyne's longer term goal is to be able to work with the vehicle manufacturers to improve new cars' miles per gallon or liters per 100 kilometers. By combining our products with exhaust turbochargers, smaller engines can be used to reduce vehicle weight while maintaining initial acceleration. Also identified were the product requirements we needed to be successful in the vehicle marketplace. These were:-
1. Reduce the unit cost,
2. Simplify the manufacturing process,
3. Increase unit reliability, and
4. Reduce electrical power consumption.
In addition, we have substantially reduced the weight of our products and made the control systems smaller and more useful, something that is extremely important for the small engine segment and the retrofit market.
We believe that these developments provide the Company with potential for substantial growth but this will require investment. We have the following major goals, given appropriate funding:-
o To have products in the market place by the fourth quarter or before. We are working on three market areas.
o To get operating income close to, or at breakeven by the first quarter of 2009 or before and positive for all of 2009.
There is no assurance that we will obtain sufficient funding or otherwise be able to achieve our goals.
RESULTS OF OPERATIONS ------------------------------------------------------------ First Quarter Ended March 31 ------------------------------------------------------------ Percentage 2008 2007 Increase (Decrease) -------------------- -------------------- ------------------ Total Revenue $5,556 $5,556 Nil Operating Expenses ($449,361) ($396,277) 13% Net Loss from Operations ($443,805) ($390,721) 14% Other Income (expense), net ($690,681) ($465,242) (48%) ==================== ==================== ================== Net Loss ($1,134,486) ($855,963) (33%) ==================== ==================== ================== NET REVENUE ------------------------------------------------------------ First Quarter Ended March 31 ------------------------------------------------------------ Percentage 2008 2007 Increase -------------------- -------------------- ------------------ License Fee $5,556 $5,556 Nil ==================== ==================== ================== |
We had no revenue in 2008 other than recognition of amortized license fees. During the year ended December 31, 2003, $400,000 in license fees were deferred and amortized over 18 years. As a result, for each of the quarters ended March 31, 2008 and 2007, $5,556 of licensing fees was recognized as income. Our continued net losses from operations reflect our continued operating expenses and our inability to generate revenues. We believe that we will not be able to generate any significant revenues from TurboPac(TM)/TurboFlow(TM) until we complete our productiOn models and enter into commercial arrangements.
COSTS OF SALES
We had no sales in 2008 and 2007; therefore we did not have any costs of sales during any portion of these years
OPERATING EXPENSES
Operating expenses increased from the comparable period in 2007. The primary components of our operating expenses are outlined in the table below:
First Quarter Ended March 31 --------------------------------- Percentage 2008 2007 Increase (Decrease) Selling, General and Administrative Expenses $255,848 $235,040 8.92% Research and Development Expenses $110,558 $80,941 36.6% Litigation Expenses $82,065 $79,759 2.9% |
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative costs included management compensation and overhead
and including non cash warrant expense amount of $35,795 ($87,405 in 2007).
(Financial Statement Note 3)
RESEARCH AND DEVELOPMENT
The increase in research and development costs in 2008 is due to increased spending for limited development operations and the increase in the non cash warrant expense amount of $18,805. For the quarter ending March 31, 2007 the non cash warrant expense was included in selling, general and administrative expenses. Our research and development costs related to present and future products are charged to operations in the period incurred. Our research and development activities during 2007 are associated with the development of our TurboPac-related technology "TurboFlow".
LITIGATION EXPENSE
The most significant component of our litigation expense was the accrued interest relating to TST, Inc. settlement as well as additional legal fees to defend a new action discussed in Financial Statement Note 5.
COMPENSATION EXPENSE
During 2006 and 2007, warrants to purchase 78,200,000 shares of our common stock were included as additional compensation in the contracts of various consultants that we deemed essential to our operations. Of these warrants, 2,169,444 were vested and reflected as an expense for the three months ended March 31, 2008. As of December 31, 2007 9,677,776 warrants were vested and reflected as an expense and 6,494,444 shares vested in 2006. Therefore the total vested as of March 31, 2008 was 18,341,664. As a result, we recognized $54,600 of non-employee compensation expense during the quarter ended March 31, 2008 compared to $87,405 during the quarter ended March 31, 2007. From time to time we may grant a significant number of options or warrants to purchase common stock to non-employees.
OTHER INCOME (EXPENSE)
-------------------------------------------- Quarter Ending March 31 -------------------------------------------- Percentage 2008 2007 Increase (Decrease) ------------ --------------- --------------- Debt Relief -- $122,050 (100%) ------------ --------------- --------------- Other Expenses Interest Expense ($22,030) ($8,990) 145% Amortization of Discount on Convertible Notes ($240,194) ($155,902) 54% Inducement Expense ($426,857) ($422,400) (1%) ------------ --------------- --------------- Income Tax Expense (1,600) -- 100% ------------ --------------- --------------- Total Other Expenses ($690,681) ($587,292) (18%) ------------ --------------- --------------- Net Other Income and Expenses ($690,681) ($465,242) (49%) ============ =============== =============== |
The Company continues to negotiate with our creditors and trade debt holders on settlement of accounts payable from periods prior to the current management assuming operation of the Company. When achieved, this is represented as a debt relief of accounts payable.
The Company had other expenses for the quarter ending March 31, 2008 of $667,051 compared to $587,302 in 2007. As indicated above, these expenses consisted of amortization of discounts on convertible notes and value of detachable warrants and for related debt conversion expenses (Financial Statement Note 7).
NET INCOME / LOSS
Our net loss for the Quarter ending March 31 2008 increased to $1,134,486 from net loss of $855,963 for the Quarter Ending March 31, 2007, representing an increase of 33%. The increase is directly related to the increase in expenses from the amortization of discounts on convertible notes and value of detachable warrants and for related debt conversion expenses since the operating loss increased by $53,084 or 13%.
We believe, however that recent technical developments provide the Company with potential for substantial growth but this will require investment. We have the following major goals, given appropriate funding:
o To have products in the market place by the fourth quarter of 2008 or before. We are working on three market areas.
o To get operating income close to, or at breakeven by the first quarter of 2009 or before and positive for all of 2009.
If we do not achieve our goals we anticipate for the foreseeable future we will continue to have losses as we will incur operating expenses in completing our development without any revenues. Such losses will continue until such time as we generate revenue from sales or licensing of our products in excess of our operating expenses.
FINANCIAL CONDITION
CASH AND WORKING CAPITAL --------------------------- --------------------------- ------------------------- March 31, 2008 December 31, 2007 Percentage Increase / (Decrease) --------------------------- --------------------------- ------------------------- Current Assets $726 $3,458 (79.0%) Current Liabilities ($8,656,657) ($8,619,585) 0.4% --------------------------- --------------------------- ------------------------- Working Capital Deficit ($8,655,931) ($8,616,127) 0.4% =========================== =========================== ========================= |
The increase to our working capital deficit was primarily attributable to a decrease in cash and an increase in convertible notes and provision for lawsuit settlements as discussed below.
LIABILITIES
----------------- ------------------------ ---------------------- March 31, 2008 December 31, 2007 Percentage Increase/ (Decrease) ----------------- ------------------------ ---------------------- Provisions for Lawsuit Settlements $5,073,932 $4,994,173 2% Accounts Payable $2,111,638 $2,132,439 (1%) Accrued Liabilities $322,167 $292,000 (10%) Short-Term Loans $1,148,920 $1,200,973 (4%) |
The increase in provision for lawsuits is due to accrued interest on outstanding judgments. Accounts payable decreased due to a settlement of debt with stock and payments of debt. Short-term loans decreased due to the conversion of $330,000 of notes to the Company's common stock. The decrease is offset by additional short term loans of $123,500 in connection with our note financing to generate cash. Short-term loans are net of discounts of $67,023 ($199,726) in 2007) and warrant allocation of $24,406 ($53,501 in 2007) which nevertheless represents actual cash obligations (Financial Statement Note 4).
We continue to negotiate with our creditors for the payment of our accounts payable and accrued liabilities. Payment of these liabilities is contingent on new funding being received that would enable us to make payments to the creditors. Our ability to continue our operations may also be conditional upon the forbearance of our creditors.
Included in short-term loans at March 31, 2008 are unsecured, non-interest bearing advances of $138,600 that we anticipate will be converted into shares of our common stock.
The holders of a total of $921,000 principal amount of convertible notes of the Company have indicated that they will convert the principal and interest of such notes into 102,921,108 common shares.
At March 31, ------------------------- 2008 2007 ---- ---- Net Cash provided by (used in) Operating Activities ($126,232) ($281,186) Net Cash provided by (used in) Financing Activities $123,500 $356,000 Net Increase (Decrease) in Cash During Period ($2,732) $74,814 |
CASH USED IN OPERATING ACTIVITIES
The decrease in cash used in operating activities was due to the limited amount of funds available compared to 2007.
FINANCING REQUIREMENTS
We will require additional financing if we are to continue as a going concern and to finance our business operations. While we have obtained some financing in 2008 we need substantially more capital to complete development and continue our business. There is no assurance that we will be able to raise the required additional capital. In the event that we are unable to raise additional financing on acceptable terms, then we may have to cease operating and seek relief under appropriate statutes. Accordingly, there is substantial doubt about our ability to continue as a going concern.
We believe, however that recent technical developments provide the Company with potential for substantial growth but this will require investment. We have the following major goals, given appropriate funding:-
o To have products in the market place by the fourth quarter or before. We are working on three market areas.
o To get operating income close to, or at breakeven by the first quarter of 2009 or before and positive for all of 2009.
There is no assurance that we will obtain sufficient funding or otherwise be able to achieve our goals.
CRITICAL ACCOUNTING POLICIES
STOCK BASED COMPENSATION
Effective January 1, 2005 the Company adopted SFAS 123(R) using the modified prospective approach and accordingly prior periods have not been restated to reflect the impact of SFAS 123R. Under SFAS 123R, stock-based awards granted prior to its adoption will be expensed over the remaining portion of their vesting period. These awards will be expensed under the straight-line method using the same fair value measurements which were used in calculating pro forma stock-based compensation expense under SFAS 123. For stock-based awards granted on or after January 1, 2005, the Company will amortize stock-based compensation expense on a straight-line basis over the requisite service period, which is generally a five-year vesting period.
SFAS 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from initial estimates. Stock-based compensation expense was recorded net of estimated forfeitures for the year ended December 31, 2005 such that expense was recorded only for those stock-based awards that are expected to vest. Previously under APB 25 to the extent awards were forfeited prior to vesting, the corresponding previously recognized expense was reversed in the period of forfeiture.
REVENUE RECOGNITION
Prior to the suspension of our operations in 2003, we recognized revenue upon shipment of product. Since the re-commencement of operations, we recognize license and royalty fees over the term of the license or royalty agreement. During the year ended December 31, 2003, $400,000 in license fees were deferred and amortized over 18 years. As a result, for the quarter ended March 31, 2008, $5,556 ($5,556 in 2007) of licensing fees was recognized as income.
RESEARCH AND DEVELOPMENT
Research and development costs related to present and future products are charged to operations in the period incurred. Previously, research prototypes were sold and proceeds reflected by reductions in our research and development costs. As new technology pre-production manufacturing units are produced and related non-recurring engineer services are delivered we will recognize the sales proceeds as revenue.
NEW ACCOUNTING PRONOUNCEMENTS
In September 2006, the FASB issued Statement No. 158, "Employer's Accounting for Defined Benefit Pension and Other Postretirement Plans - an amendment of FASB Statements No. 87, 88, 106, and 132(R)" ("SFAS 158"). This statement requires the full recognition, as an asset or liability, of the overfunded or underfunded status of a company-sponsored postretirement benefit plan. Adoption of this statement is required effective for the Company's fiscal year ending December 31, 2007. The adoption of SFAS 158 has not had a material effect on the Company as it has no defined benefit plans
In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 157, "Fair Value Measurements" ("SFAS 157"), which defines the fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS 157 was effective for the Company on January 1, 2008. The Company plans to adopt the provisions of SFAS No. 157 on June 1, 2008 and is currently assessing the impact of the adoption of SFAS No. 157 on its results of operations and financial condition.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities" ("SFAS 159") which permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. SFAS 159 was effective for the Company on January 1, 2008. The Company plans to adopt the provisions SFAS No. 159 on June 1, 2008 and is currently assessing the impact of the adoption of SFAS No. 159 on its results of operations and financial condition..
In December 2007, the FASB issued SFAS No. 141R, "Business Combinations" ("SFAS 141R"). SFAS 141R revises the principles and requirements for how the acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non controlling interest in the acquiree, and the goodwill acquired in a business combination or gain from a bargain purchase. SFAS 141R also revises the principles and requirements for how the acquirer determines what information to disclose to enable users of the
financial statements to evaluate the nature and financial effects of the business combination. This pronouncement will be effective for the Company on January 1, 2009. The Company is currently evaluating the impact, if any, that SFAS 141R will have on its financial position or results of operations.
Also in December 2007, the FASB issued SFAS No. 160, "Non controlling Interest in Consolidated Financial Statements -- an amendment of ARB No. 51" ("SFAS 160"). SFAS 160 amends ARB No. 51 to establish accounting and reporting standards for the non controlling interest in a subsidiary and for the deconsolidation of a subsidiary. This pronouncement will be effective for the Company on January 1, 2009. The Company is currently evaluating the impact, if any, that SFAS 160 will have on its financial position or results of operations.
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS No. 161"). SFAS 161 requires companies with derivative instruments to disclose information that should enable financial-statement users to understand how and why a company uses derivative instruments, how derivative instruments and related hedged items are accounted for under FASB Statement No. 133 "Accounting for Derivative Instruments and Hedging Activities" and how derivative instruments and related hedged items affect a company's financial position, financial performance and cash flows. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company is currently evaluating the impact, if any, that SFAS 161 will have on its financial position or results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
NOT APPLICABLE.
ITEM 4. CONTROLS AND PROCEDURES.
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
As required by Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the Company's Chief Executive Officer and its Chief Financial Officer reviewed and evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)).These controls are designed to ensure that material information the Company must disclose in its reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported on a timely basis. These officers have concluded, based on that evaluation, that as of such date, the Company's disclosure controls and procedures were effective at a reasonable assurance level for a Company with substantially no activities and no personnel. The Company believes it must devise new procedures as it increases its activity and its personnel.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act Rule
13a-15(f). As required by Rule 13a-15 under the Exchange Act the Company's Chief
Executive Officer and its Chief Financial Officer assessed the effectiveness of
our internal control over financial reporting as of March 31, 2008. In making
its assessment of internal control over financial reporting, management used the
criteria described in Internal Control -- Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
Based on this assessment management identified material weaknesses in the Company's internal controls over financial reporting due in a significant part to the pervasive effect of the lack of resources, specifically the limited number of personnel involved in the financial reporting including the number of persons that are appropriately qualified in the areas of U.S. GAAP and SEC reporting. These limitations include an inability to segregate functions. Because of this weakness there is a possibility that a material misstatement of the annual financial statements would not have been prevented or detected. Nevertheless the Company's Chief Executive Officer and Chief Financial Officer believed that for the limited operations of the Company internal controls over financial reporting were adequate to provide reasonable assurance of the accuracy of the Company's financial statements at year end. The adverse effect of the material weakness over internal controls, however, will become magnified if the Company increases operations.
Due to the complexity of the accounting for the convertible notes with detachable warrants, there were material additional adjustments made to our annual financial statements prior to their publication in this report as well as interim financial statements after filing. In management's view, this was not the result of a material weakness in internal control but due to the complexity of the accounting rules and their interpretations affecting transactions of this nature.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
A former consultant has filed a complaint in Supreme Court of the State of New York for the County of New York for an action entitled CRESCENT FUND, LLC v TURBODYNE TECHNOLOGIES, INC. The action seeks $200,000 damages based upon claims for alleged breaches of contract and covenants of good faith and fair dealing. Plaintiff received a certificate for 5,000,000 shares of our common stock to perform investor relations services for us under a contract. The damages, it is claimed, arose because we failed to give plaintiff an opinion to sell the shares. It is the Company's position that plaintiff failed to perform any of the duties and obligations required of it under the aforesaid contract which was fraudulently induced. Therefore plaintiff is not entitled to retain the shares. The Company has filed an answer and counterclaim for the return of such shares and damages based upon plaintiff's breach and fraud. The Company does not anticipate a liability therefore has not included an amount in the provision for lawsuit settlements. Subsequent to year end the Company agreed to a nonmonetary settlement permitting the plaintiff to retain a majority of its shares but releasing the Company from all liability with any payments.
ITEM 2. CHANGES IN SECURITIES.
The following issuances of securities occurred during the three months ended March 31, 2008.
During the three months ended March 31, 2008 we sold 1 unit of our securities in a private placement. Each unit consisted of a $100,000, 18% convertible note and warrants to purchase 2,000,000 of our shares at $0.025. The note is convertible at any time prior to payment. The conversion price was two cents ($0.02). The securities were issued pursuant to Section 4(2) of the Securities Act of 1933 and are exempt from the registration requirements under that act. In addition during such quarter $330,000 of principal of the aforesaid notes were converted into 48,123,194 shares of our common stock. These latter shares were issued pursuant to Section 3a (9) of the Securities Act of 1933 and are exempt from the registration requirements under that act.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
EXHIBITS
EXHIBIT
NUMBER
DESCRIPTION OF EXHIBIT
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized.
TURBODYNE TECHNOLOGIES, INC.
Signature TITLE DATE ----- ---- /s/ Jason Meyers Co-Chief Executive Officer, May 21, 2008 ________________________ Director Jason Meyers /s/ Debi Kokinos Chief Financial Officer May 21, 2008 _________________________ and Chief Accounting Officer Debi Kokinos |
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