Attached files
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, 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
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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
-------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (805) 512-9511
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NOT APPLICABLE
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(Former name, former address and former fiscal year
end, if changed since last report)
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 [X]
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: 659,932,496 shares of common stock
issued and outstanding as of MAY 3, 2010.
Turbodyne Technologies, Inc.
INDEX TO FORM 10-Q
MARCH 31, 2010
PAGE
NUMBER
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of March 31, 2010 and
December 31, 2009 4
Condensed Consolidated Statements of Operations for the three
month periods ended March 31, 2010 and March 31, 2009 5
Condensed Consolidated Statements of Cash Flows for the three
month periods ended March 31, 2010 and March 31, 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 31
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 NA
Item 6. Exhibits 33
SIGNATURES 34
2
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED
MARCH 31, 2010 AND 2009
(UNAUDITED - EXPRESSED IN US DOLLARS)
3
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TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(EXPRESSED IN US DOLLARS)
MARCH 31 DECEMBER 31
2010 2009
-----------------------------------------------------------------------------------------------------------------
ASSETS (UNAUDITED)
CURRENT
Cash $ 27,042 $ 3,037
------------------------------------------
TOTAL CURRENT ASSETS 27,042 3,037
PROPERTY AND EQUIPMENT, net 12,303 13,408
------------------------------------------
TOTAL ASSETS $ 39,345 $ 16,445
=================================================================================================================
LIABILITIES AND STOCKHOLDERS' DEFICIT
LIABILITIES
CURRENT
Accounts payable $ 2,056,580 $ 2,002,746
Accrued liabilities 321,000 300,000
Accrued liability - lawsuit settlements (Note 5) 5,837,304 5,731,145
Loans payable (Note 3) 561,414 550,777
------------------------------------------
TOTAL CURRENT LIABILITIES 8,776,298 8,584,668
LONG-TERM
Convertible loans payable and interest net of discount (Note 4) 212,371 184,237
Deferred licensing fee 247,050 252,606
------------------------------------------
459,421 436,843
------------------------------------------
TOTAL LIABILITIES 9,235,719 9,021,511
------------------------------------------
STOCKHOLDERS' DEFICIT
Share Capital (Note 2)
Authorized
1,000,000 Series X 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
583,580,158 and 577,580,158 common shares in 2010 and 2009, 583,581 577,581
respectively
Treasury stock, at cost (5,278,580 shares) (1,963,612) (1,963,612)
Additional paid-in capital 128,094,735 128,029,567
Other comprehensive income -
Foreign exchange translation gain 35,119 35,119
Accumulated deficit (135,946,209) (135,683,733)
------------------------------------------
TOTAL STOCKHOLDERS' DEFICIT (9,196,374) (9,005,066)
------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 39,345 $ 16,445
=================================================================================================================
The accompanying notes are an integral part of these unaudited
consolidated financial statements.
4
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TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED - EXPRESSED IN US DOLLARS)
FOR THE THREE-MONTH PERIODS ENDED MARCH 31 2010 2009
------------------------------------------------------------------------------------------------------------------
REVENUE
----------------------------------------
Amortization of licensing fees $ 5,556 $ 5,556
----------------------------------------
EXPENSES
Selling, general and administrative 137,797 98,098
Research and development - 25,808
Litigation 106,159 96,508
Depreciation and amortization 1,105 1,502
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TOTAL EXPENSES 245,061 221,916
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LOSS FROM OPERATIONS (239,505) (216,360)
OTHER INCOME (EXPENSE)
Interest expense (16,637) (9,300)
Amortization of discount on convertible notes (Note 4) (4,734) -
----------------------------------------
NET LOSS BEFORE TAXES (260,876) (225,660)
Income tax expense (1,600) (1,600)
----------------------------------------
NET LOSS FOR THE PERIOD $ (262,476) $ (227,260)
==================================================================================================================
NET LOSS PER COMMON SHARE - BASIC AND DILUTED $ (0.00) $ (0.00)
==================================================================================================================
WEIGHTED AVERAGE SHARES - BASIC AND DILUTED 579,646,825 549,513,491
==================================================================================================================
The accompanying notes are an integral part of these unaudited
consolidated financial statements.
5
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TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED - EXPRESSED IN US DOLLARS)
FOR THE THREE-MONTH PERIODS ENDED MARCH 31 2010 2009
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OPERATING ACTIVITIES
Net loss for the period $ (262,476) $ (227,260)
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 1,105 1,502
Amortization of discount on convertible debt (Note 4) 4,734 -
Stock for services 57,778 2,000
Warrant compensation (Note 2) 5,790 7,688
(Increase) decrease in operating assets
Prepaid expenses and other current assets - -
Increase (decrease) in operating liabilities
Accounts payable 53,834 94,771
Accrued liabilities and accrued liability for lawsuit settlements 143,796 126,807
-------------------------------------------
Net cash used in operating activities (995) (48)
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FINANCING ACTIVITIES
Notes payable 25,000 -
-------------------------------------------
Net cash provided by financing activities 25,000 -
-------------------------------------------
NET INCREASE (DECREASE) IN CASH 24,005 (48)
CASH, beginning of period 3,037 68
-------------------------------------------
CASH, end of period $ 27,042 $ 20
===================================================================================================================
SUPPLEMENTARY DISCLOSURE OF NON-CASH INFORMATION
BENEFICIAL CONVERSION FEATURE OF CONVERTIBLE DEBT $ 3,800 $ -
VALUE OF WARRANTS ISSUED WITH CONVERTIBLE DEBT 3,800 -
===================================================================================================================
The accompanying notes are an integral part of these unaudited
consolidated financial statements.
6
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited - Expressed in US Dollars)
MARCH 31, 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.
GOING CONCERN
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. The Company
has suffered net operating losses in recent periods, has an accumulated
deficit of $135,946,209 at March 31, 2010 and a total capital deficit of
$9,196,374 at March 31, 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.
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
adjustments which would be necessary if the Company is unable to continue
as a going concern.
BASIS OF PRESENTATION
The interim financial statements included herein, presented in accordance
with United States generally accepted accounting principles and stated in
US dollars, have been prepared by the Company, without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission and
with the instruction to Form 10-Q and Rule 8-03 of Regulation S-X. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are
adequate to make the information presented not misleading.
These financial statements reflect all adjustments, consisting of normal
recurring adjustments, which in the opinion of management are necessary
for fair presentation of the information contained therein. It is
suggested that these interim financial statements be read in conjunction
with the audited financial statements of the Company for the years ended
December 31, 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
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(UNAUDITED - EXPRESSED IN US DOLLARS)
MARCH 31, 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 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
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(UNAUDITED - EXPRESSED IN US DOLLARS)
MARCH 31, 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 in the table below. The Company believes that the carrying value of
its cash, accounts payable and accrued liabilities as of March 31, 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
quarter ended March 31, 2010 $5,556 ($5,556 in 2009) of licensing fees was
recognized as income.
9
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(UNAUDITED - EXPRESSED IN US DOLLARS)
MARCH 31, 2010 AND 2009
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
CONTINUED
EARNINGS (LOSS) PER SHARE
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 quarter ended March 31, 2010, 12,675 preferred shares convertible
into 1,267,500 shares of common stock and convertible notes to purchase
51,236,669 shares of common stock were outstanding during the three
months. The weighted average cumulative equivalent shares of 579,646,825
were included in the denominator for 2010 computation of diluted earnings
(loss) per share. At March 31, 2010 there were 9,674,000 options and
53,753,320 warrants to purchase shares of common stock outstanding. These
options and warrants were not included in the diluted loss per share
calculation because the effect would have been anti-dilutive. No other
adjustments were made for purposes of per share calculations.
For the quarter ended March 31, 2009, 12,675 preferred shares convertible
into 1,267,500 shares of common stock and convertible notes to purchase
28,155,158 shares of common stock were outstanding during the three
months. The weighted average cumulative equivalent shares of 549,513,491
were included in the denominator for 2009 computation of diluted earnings
(loss) per share. At March 31, 2009 there were 17,799,000 options and
45,294,988 warrants to purchase shares of common stock outstanding. These
options and warrants were not included in the diluted loss per share
calculation because the effect would have been anti-dilutive. 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
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(UNAUDITED - EXPRESSED IN US DOLLARS)
MARCH 31, 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.
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 minimum tax for two companies.
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 quarter ended March 31, 2010 and
2009.
11
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(UNAUDITED - EXPRESSED IN US DOLLARS)
MARCH 31, 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 March 2010, the FASB issued Accounting Standards Update 2010-11,
DERIVATIVES AND HEDGING (TOPIC 815): SCOPE EXCEPTION RELATED TO EMBEDDED
CREDIT DERIVATIVES. ASU 2010-11 clarifies and amends the accounting for
credit derivatives embedded in beneficial interests in securitized
financial assets. Currently, certain credit derivative features embedded
in beneficial interests in securitized financial assets are not accounted
for as derivatives. The new guidance will eliminate the scope exception
for embedded credit derivatives (except those that are created solely by
subordination) and provides new guidance on the evaluation to be
performed. Bifurcation and separate recognition may be required for
certain beneficial interests that are currently not accounted for at fair
value through earnings. The new guidance is effective at the beginning of
its first fiscal quarter beginning after June 15, 2010. Early adoption is
permitted at the beginning of each entity's first fiscal quarter beginning
after March 5, 2010. At adoption, a company may make a one-time election
to apply the fair value option on an instrument-by-instrument basis for
any beneficial interest in securitized financial assets. The Company is
determining the impact that ASU 2010-11 may have on its 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 is not expected to have a
material impact on the Company's financial statements.
12
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(UNAUDITED - EXPRESSED IN US DOLLARS)
MARCH 31, 2010 AND 2009
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
CONTINUED
NEW ACCOUNTING PRONOUNCEMENTS - CONTINUED
In January 2010, the FASB issued Accounting Standards Update ("ASU") No.
2010-06, FAIR VALUE MEASUREMENTS AND DISCLOSURES (TOPIC 820): IMPROVING
DISCLOSURES ABOUT FAIR VALUE MEASUREMENTS. ASU 2010-06 amends Codification
Subtopic 820-10 to add two new disclosures: (1) transfers in and out of
Level 1 and 2 measurements and the reasons for the transfers, and (2) a
gross presentation of activity within the Level 3 roll forward. The
proposal also includes clarifications to existing disclosure requirements
on the level of disaggregation and disclosures regarding inputs and
valuation techniques. The proposed guidance would apply to all entities
required to make disclosures about recurring and nonrecurring fair value
measurements. The effective date of the ASU is the first interim or annual
reporting period beginning after December 15, 2009, except for the gross
presentation of the Level 3 roll forward information, which is required
for annual reporting periods beginning after December 15, 2010 and for
interim reporting periods within those years. Early application is
permitted. The Company is currently assessing the impact that the adoption
will have on its financial statements.
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 March 31, 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 three months ended March 31, 2010 the Company issued
6,000,000 shares of common stock for payment of services.
During the three months ended March 31, 2009 the Company did not
issue any shares.
13
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(UNAUDITED - EXPRESSED IN US DOLLARS)
MARCH 31, 2010 AND 2009
2. SHARE CAPITAL - CONTINUED
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.
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 January through December 2009 (3,466,664)
Vested January through March 2010 (1,155,555)
----------
Warrants not vested 36,977,781
==========
During the three months ended March 31, 2010 the Company using the
Black-Scholes model recorded $5,790 ($7,688 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 $5,790 ($5,880 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 three months ended March 31, 2010 ranged from $0.0029 to
$0.0065. Assumptions used to value the warrants: expected dividend
yield Nil%; expected volatility of 101.92% and 142.90%; risk-free
interest rate of 3.05%, 3.08% and 3.28% and an expected life of 7
years.
14
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(UNAUDITED - EXPRESSED IN US DOLLARS)
MARCH 31, 2010 AND 2009
2. SHARE CAPITAL - CONTINUED
d) Stock Purchase Warrants
At March 31, 2010 the Company had 54,253,320 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 $0.015 per
share and expiration dates between 2011 and 2016. Details of share
purchase warrants for the quarter ended March 31, 2010 are as
follows:
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 $0.02 1,155,555 $0.01 1,655,555 $0.01
---------- ---------- ----------
Warrants outstanding and
exercisable at end of
period 24,620,000 $0.02 29,633,320 $0.01 54,253,320 $0.02
========== ========== ==========
Weighted average fair
value of warrants
granted during the period -- -- $0.01 $0.01
=============================================================================
At March 31, 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 32,299,992 4.94 $0.01
$0.025 - 0.04 21,953,328 2.70 0.02
----------
54,253,320 4.03 $0.01
==========
15
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED - EXPRESSED IN US DOLLARS)
MARCH 31, 2010 AND 2009
3. SHORT-TERM LOANS PAYABLE
March 31, December 31,
2010 2009
-----------------------------
Unsecured, non-interest bearing loan payable, due on
demand from stockholders and other parties $ 138,600 $ 138,600
Note payable, 5% per annum - related party (note 3 and 6) 53,779 53,204
Convertible notes payable - related party (note 3 and 6) 42,293 41,856
Convertible notes payable (note 3) 326,742 317,117
-----------------------------
Total Loans Payable $ 561,414 $ 550,777
=============================
16
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED - EXPRESSED IN US DOLLARS)
MARCH 31, 2010 AND 2009
3. SHORT-TERM LOANS PAYABLE - CONTINUED
As of March 31, 2010, convertible notes consist of:
Issued Issued Issued Issued Issued Issued
through from from from From From
Sept Nov 06 to Mar 07 to Sep 07 to Jan 08 to Apr 08 to
2006 Feb 07 Aug 07 Dec 07 Mar 08 Jun 08 Total
------------ ------------ ------------ ------------ ------------ ------------ ------------
Proceeds from
issuances of
convertible debt $ 615,000 $ 95,000 $ 441,000 $ 200,000 $ 100,000 $ 200,000 $ 1,651,000
Less: Debt
conversions (530,000) (95,000) (441,000) (200,000) (100,000) -- (1,366,000)
------------ ------------ ------------ ------------ ------------ ------------ ------------
85,000 -- -- -- -- 200,000 285,000
------------ ------------ ------------ ------------ ------------ ------------ ------------
Discount on
convertible debt
Value allocated
to warrants 88,144 8,041 118,485 51,035 24,198 48,052 337,955
Beneficial
conversion
feature 521,756 86,959 322,515 148,965 54,198 68,052 1,202,445
------------ ------------ ------------ ------------ ------------ ------------ ------------
609,900 95,000 441,000 200,000 78,396 116,104 1,540,400
Accumulated
amortization of
value allocated
to warrants (88,144) (8,041) (118,485) (51,035) (24,198) (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 17,135 -- -- -- -- 66,900 84,035
------------ ------------ ------------ ------------ ------------ ------------ ------------
Net Convertible Debt $ 102,135 $ -- $ -- $ -- $ -- $ 266,900 $ 369,035
============ ============ ============ ============ ============ ============ ============
Original Lower of 70%
conversion of market or
price $ 0.025 $ 0.005 $ 0.020 $ 0.020 $ 0.020 $ 0.020 --
Modified
conversion
price $ 0.005 N/A N/A N/A N/A N/A --
Interest rate 5% 5% 5% 18% 18% 18% --
Maturity from
date of issuance 1 year 1 year 1 year 6 months 6 months 6 months --
Warrants issued 12,300,000 1,900,000 8,820,000 4,000,000 2,000,000 4,000,000 33,020,000
Warrants exercised (11,900,000) -- -- -- -- -- (11,900,000)
----------- ----------- ------------ ------------ ------------ ------------ ------------
Warrants remaining 400,000 1,900,000 8,820,000 4,000,000 2,000,000 4,000,000 21,120,000
----------- ----------- ------------ ------------ ------------ ------------ ------------
Market value
of warrants
at date of
issuance $ 150,884 $ 48,863 $ 398,872 $ 140,612 $ 41,498 $ 69,572
Assumptions
for Black-Scholes
valuation of
warrants
Original exercise
price $ 0.025 $ 0.020 $ 0.020 $ 0.025 $ 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%
17
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED - EXPRESSED IN US DOLLARS)
MARCH 31, 2010 AND 2009
3. SHORT-TERM LOANS PAYABLE - CONTINUED
For the quarter ended March 31, 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
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. Of the notes issued from
2006 through 2008, $285,000 remain outstanding and had accrued interest of
$73,972 as of December 31, 2009 and $84,035 as of March 31, 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.
4. LONG-TERM CONVERTIBLE LOANS PAYABLE
March 31, 2010 December 31, 2009
Long-term convertible loans payable $225,000 $200,000
Accrued Interest 18,797 12,798
Less Debt discount from beneficial
conversion feature and warrants (31,426) (28,561)
------- --------
Total Long-term Convertible
Loans Payable $212,371 $184,237
======== ========
For the three months ended March 31, 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 warrant 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.
18
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED - EXPRESSED IN US DOLLARS)
MARCH 31, 2010 AND 2009
4. LONG-TERM CONVERTIBLE LOANS PAYABLE - CONTINUED
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 three months ended March 31, 2010 the
amortization of the discount was $3,687. As of March 31, 2010, the
remaining balance of the detachable warrants was $21,457. 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 three months ended March 31,
2010, the amortization of the discount was $1,047. As of March 31, 2010,
the remaining balance of the beneficial conversion feature is $9,969. As
of December 31, 2009, the remaining balance of the beneficial conversion
feature was $7,216.
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 a guarantor.
On May 1, 2002 the Company and TST agreed to the immediate entry of
judgment against the Company in the amount of $2,068,078 plus
interest from May 1, 2002 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 obtain a writ for execution 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.
19
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED - EXPRESSED IN US DOLLARS)
MARCH 31, 2010 AND 2009
5. COMMITMENTS AND CONTINGENCIES - LITIGATION CONTINUED
a) TST, Inc. - Continued
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 of the Company's common shares issued in
connection with the TST settlement had been sold which have reduced
the lawsuit judgment by $23,345.
At March 31, 2010, the Company has included $4,435,519 ($4,039,836
in 2009) in regard to this matter in accrued liability for lawsuit
settlements. It was determined that TST received payment in
preference to other creditors before Pacific Baja filed its Chapter
11 petition for 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 accrued liability for lawsuit
settlements.
---------------------------------------
March 31, 2010 December 31, 2009
---------------------------------------
Settlement amount $2,068,079 $2,068,079
Interest 2,307,785 $2,201,626
Preference payment $83,000 $83,000
Proceeds of stock sale ($23,345) ($23,345)
---------------------------------------
Total $4,435,519 $4,329,360
-------------------------------------------------------------------------------
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 the Company 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 of claims under any applicable directors and officers
liability insurance policies. The bankruptcy Trust also agreed to a
covenant not to obtain a writ of execution 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.
20
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED - EXPRESSED IN US DOLLARS)
MARCH 31, 2010 AND 2009
5. COMMITMENTS AND CONTINGENCIES - CONTINUED
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 which is
approximately $331,100 plus 5% interest per annum against the
Defendants in respect of actions taken by the Defendants while
employed by 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
indicated 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 the case and seek its dismissal. At March 31,
2010, the Company has included $405,785 in regard to this matter in
the accrued liability for lawsuit settlements.
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 a legal 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 of contract 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 does
not anticipate any liability and therefore did not include an amount
in the accrued liability 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 other liability.
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)
MARCH 31, 2010 AND 2009
6. RELATED PARTY TRANSACTIONS
Aspatuck Holdings Ltd. and another entity affiliated with Jason Meyers
have loaned an aggregate of $ 46,000 to the Company plus related interest
expense of $7,779 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 March 31, 2010 and December 31, 2009 the Company also owes Aspatuck
Holdings Ltd consulting fees of $442,227 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 March 31, 2010 and 2009. The Company also
included $4,454 and $4,523 of non cash warrant expense for the quarter
ended March 31, 2010 and 2009 respectively.
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 March 31, 2010 and December 31, 2009, with
total outstanding balance including accrued interest of $42,293 and
$41,856, respectively, which includes accrued interest of $7,293 and
$6,856, respectively. The Company recorded $3,778 and $2,000 general and
administrative expense for the stock compensation to be issued to John
Adams for the quarter ended March 31, 2010 and 2009, respectively.
As of March 31, 2010 and December 31, 2009 the Company owes Debi Kokinos,
CFO consulting fees of $108,500 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 March 31, 2010 and 2009.
The Company also included $1,336 and $1,357 of non cash warrant expense
for the quarter ended March 31, 2010 and 2009 respectively.
6. SUBSEQUENT EVENTS
Subsequent to March 31, 2010 note holders converted $320,000 into
76,352,328 shares of the Company's common stock. The Company agreed to
decrease the conversion price of $300,000 of these notes to $0.005 due to
the current stock value. An inducement to convert expense of $400,000 will
be recorded for the decrease in conversion price.
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
--------------------------------------------------
First Quarter Ended March 31
--------------------------------------------------
Percentage
2010 2009 Increase
(Decrease)
--------------------------------------------------
Total Revenue $5,556 $5,556 Nil
Operating Expenses ($245,061) ($221,916) 10%
Net Loss from Operations ($239,505) ($216,360) 11%
Other expense and income tax ($22,971) ($10,900) 111%
==================================================
Net Loss ($262,476) ($227,260) 15%
==================================================
NET REVENUE
--------------------------------------------------
First Quarter Ended March 31
--------------------------------------------------
Percentage
2010 2009 Increase
--------------------------------------------------
License Fee $5,556 $5,556 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 March
31, 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
Despite a lack of funds we had an increase in our operations in the first
quarter of 2010 of approximately 11% compared to 2009. The increase resulted
entirely from accruals of stock compensation. The primary components of our
operating expenses are outlined in the table below:
First Quarter Ended March 31
-----------------------------------------
Percentage
2010 2009 Increase
(Decrease)
General and Administrative Expenses $137,797 $98,098 40%
Research and Development Expenses $-0- $25,808 (100%)
Litigation Expenses $106,159 $96,508 10%
GENERAL AND ADMINISTRATIVE EXPENSES
The increase in general and administrative costs resulted from an increase in
non cash warrant and stock compensation expense amount of $5,790 and $57,778
($5,880 and $2,000 in 2009) respectively. (Financial Statement Note 2)
RESEARCH AND DEVELOPMENT
During the quarter ended March 31, 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 as discussed in Financial Statement Note 5.
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. Details
of the consultant warrants for the three months ended March 31, 2010 are as
follows:
Total consultant warrants granted 41,600,000
Vested January to December 2009 (3,466,664)
Vested January through March 31, 2010 (1,155,555)
-----------
Warrants not vested 36,977,781
===========
During the three months ended March 31, 2010 the Company using the Black-Scholes
model recorded $5,790 ($7,688 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 $5,790 ($5,880 in 2009) to general
and administrative expenses and $-0- ($1,808 in 2009) to research and
development.
OTHER INCOME (EXPENSE) AND INCOME TAX
---------------------------------------
Quarter Ending March 31
---------------------------------------
Percentage
2010 2009 Increase
(Decrease)
---------------------------------------
Other Expenses
Interest Expense ($16,637) ($9,300) 79%
Amortization of Discount on
Convertible Notes ($4,734) $-0- 100%
Income Tax ($1,600) ($1,600) Nil
--------------------------
Total Other Expenses ($22,971) ($10,900) 111%
==========================
The Company continues to negotiate with our creditors and trade debt holders on
settlement of accounts payable from periods prior to the current management
assuming operation of the Company. When achieved, this is represented as a debt
relief of accounts payable.
The Company had other expenses for the quarter ended March 31, 2010 of $21,371
compared to $9,300 in 2009. As indicated above, the increase resulted from an
increase in the interest on convertible notes and an increase in the
amortization of discounts on convertible notes and value of detachable warrants
and related debt conversion expenses (Financial Statement Note 4).
26
NET INCOME / LOSS
Our net loss for the Quarter Ending Ended March 31 2010 increased to $262,476
from net loss of $227,260) for the Quarter Ended March 31, 2009, representing an
increase of 15%. The increase is directly related to common stock compensation,
an increase in convertible note interest and an increase in expenses from the
amortization of discounts on convertible notes and value of detachable warrants
and for related debt conversion expenses.
FINANCIAL CONDITION
CASH AND WORKING CAPITAL
------------------------------------------------------
March 31, 2010 December 31, 2009 Percentage
Increase/(Decrease)
------------------------------------------------------
Current Assets $27,042 $3, 037 790%
Current Liabilities ($8,776,298) ($8,584,668) 2%
---------------------------------
Working Capital Deficit ($8,749,256) ($8,581,631) 2%
=================================
The increase to our working capital deficit was primarily attributable to an
increase in accounts payable and an increase in accrued liability for lawsuit
settlements as discussed below.
LIABILITIES
-------------------------------------------------------
March 31, 2010 December 31, 2009 Percentage
Increase/ (Decrease)
-------------------------------------------------------
Accrued liability for
Lawsuit Settlements $5,837,304 $5,731,145 2%
Accounts Payable $2,056,580 $2,002,746 3%
Accrued Liabilities $321,000 $300,000 7%
Short-Term Loans $561,414 $550,777 2%
The increase in accrued liability for lawsuits is due to accrued interest on
outstanding judgments. Accounts payable increased due to a lack of funds to pay
creditors. Short-term loans increased due to interest expense.
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, 2010 are unsecured, non-interest
bearing advances of $138,600 that we anticipate will be converted into shares of
our common stock.
27
CASH FLOWS
--------------------
At March 31,
--------------------
2010 2009
---- ----
Net Cash provided by (used in) Operating Activities ($995) ($48)
Net Cash provided by (used in) Financing Activities $25,000 --
--------------------
Net Increase (Decrease) in Cash During Period $24,005 ($48)
====================
CASH USED IN OPERATING ACTIVITIES
The increase in cash used in operating activities in 2010 compared to 2009 was
due to funding from a convertible loan.
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.
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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 March 2010, the FASB issued Accounting Standards Update 2010-11, DERIVATIVES
AND HEDGING (TOPIC 815): SCOPE EXCEPTION RELATED TO EMBEDDED CREDIT DERIVATIVES.
ASU 2010-11 clarifies and amends the accounting for credit derivatives embedded
in beneficial interests in securitized financial assets. Currently, certain
credit derivative features embedded in beneficial interests in securitized
financial assets are not accounted for as derivatives. The new guidance will
eliminate the scope exception for embedded credit derivatives (except those that
are created solely by subordination) and provides new guidance on the evaluation
to be performed. Bifurcation and separate recognition may be required for
certain beneficial interests that are currently not accounted for at fair value
through earnings. The new guidance is effective at the beginning of its first
fiscal quarter beginning after June 15, 2010. Early adoption is permitted at the
beginning of each entity's first fiscal quarter beginning after March 5, 2010.
At adoption, a company may make a one-time election to apply the fair value
option on an instrument-by-instrument basis for any beneficial interest in
securitized financial assets. The Company is determining the impact that ASU
2010-11 may have on its 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
29
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 is
not expected to have a material impact on the Company's financial statements.
In January 2010, the FASB issued Accounting Standards Update ("ASU") No.
2010-06, FAIR VALUE MEASUREMENTS AND DISCLOSURES (TOPIC 820): IMPROVING
DISCLOSURES ABOUT FAIR VALUE MEASUREMENTS. ASU 2010-06 amends Codification
Subtopic 820-10 to add two new disclosures: (1) transfers in and out of Level 1
and 2 measurements and the reasons for the transfers, and (2) a gross
presentation of activity within the Level 3 roll forward. The proposal also
includes clarifications to existing disclosure requirements on the level of
disaggregation and disclosures regarding inputs and valuation techniques. The
proposed guidance would apply to all entities required to make disclosures about
recurring and nonrecurring fair value measurements. The effective date of the
ASU is the first interim or annual reporting period beginning after December 15,
2009, except for the gross presentation of the Level 3 roll forward information,
which is required for annual reporting periods beginning after December 15, 2010
and for interim reporting periods within those years. Early application is
permitted. The Company is currently assessing the impact that the adoption will
have on its financial statements.
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.
30
Based on this assessment management identified a 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.
31
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
NONE
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
During the three months ended March 31, 2010 we sold one-fourth unit of our
securities in a private placement. The one-fourth unit consisted of a $25,000,
12% convertible note and warrants to purchase 500,000 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.
On February 8, 2010 we issued 6,000,000 restricted shares of our common stock to
Sven Liebetanz for compensation according to the Consulting Agreement effective
January 1, 2010. The shares were issued pursuant to Section 4(2) of the
Securities Act of 1933 and are exempt from the registration requirements under
that act.
32
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
--------------------------------------------------------------------------------
31.1 Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
33
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has caused this registration statement to be signed on its behalf
by the undersigned, thereunto duly authorized.
TURBODYNE TECHNOLOGIES, INC.
Signature Title Date
----- ----
/s/ Jason Meyers Co-Chief Executive Officer, May 17, 2010
--------------------- Director
Jason Meyers
/s/ Debi Kokinos Chief Financial Officer May 17, 2010
--------------------- and Chief Accounting Officer
Debi Kokinos
3
