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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

 

 

FORM 10-Q

 

 

 

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended September 30, 2011

 

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the transition period from              to             .

Commission File Number 333-109118

 

 

Turbine Truck Engines, Inc.

(Exact Name of Registrant as Specified in Charter)

 

 

 

Nevada		59-3691650
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification Number)

46600 Deep Woods Road, Paisley, Florida 32767

(Address of Principal Executive Offices)

(386) 943-8358

(Registrant’s Telephone Number)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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 (§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 definition of “accelerated filer, large accelerated filer and smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer		¨		Accelerated filer		¨
Non-accelerated filer		¨		Smaller reporting company		x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

There were 56,502,445 shares of the Registrant’s $0.001 par value common stock outstanding as of November 21, 2011.

 

 

 

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Turbine Truck Engines, Inc.

(A Development Stage Company)

Contents

 

Part I – Financial Information
Item 1.		Financial Statements			1
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			11
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			14
Item 4T.		Controls and Procedures			14
Part II – Other Information
Item 1.		Legal Proceedings			15
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			15
Item 3.		Defaults Upon Senior Securities			15
Item 4.		Removed and Reserved			15
Item 5.		Other Information			15
Item 6.		Exhibits			15
Signatures					17

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PART I—FINANCIAL INFORMATION

Statements in this Form 10-Q Quarterly Report may be “forward-looking statements.” Forward-looking statements include, but are not limited to, statements that express our intentions, beliefs, expectations, strategies, predictions or any other statements relating to our future activities or other future events or conditions. These statements are based on our current expectations, estimates and projections about our business based, in part, on assumptions made by our management. These assumptions are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in the forward-looking statements due to numerous factors, including those risks discussed in this Form 10-Q Quarterly Report, under “Management’s Discussion and Analysis of Financial Condition or Plan of Operation” and in other documents which we file with the Securities and Exchange Commission.

In addition, such statements could be affected by risks and uncertainties related to our financial condition, factors that affect our industry, market and customer acceptance, changes in technology, fluctuations in our quarterly results, our ability to continue and manage our growth, liquidity and other capital resource issues, competition, fulfillment of contractual obligations by other parties and general economic conditions. Any forward-looking statements speak only as of the date on which they are made, and we do not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date of this Form 10-Q Quarterly Report, except as required by law.

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Item 1. Financial Statements

Turbine Truck Engines, Inc.

(A Development Stage Enterprise)

Financial Statements

As of September 30, 2011 (unaudited) and December 31, 2010 and

for the three and nine months ended September 30, 2011 and 2010 (unaudited)

and the Period November 27, 2000 (Date of Inception)

through September 30, 2011 (unaudited)

Contents

Financial Statements:

 

Balance Sheets			2
Statements of Operations			3
Statements of Cash Flows			4
Notes to Financial Statements			6

 

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Turbine Truck Engines, Inc.

(A Development Stage Enterprise)

Balance Sheets

 

		September 30, 2011				December 31, 2010
		(Unaudited)
Assets
Current assets:
Cash		$	8,604			$	128,264
Prepaid expenses			104,664				108,891
Total current assets			113,268				237,155
Agency fee-intangible, net of accumulated amortization of $0 and $57,368 (2010)							942,632
Furniture and equipment, net of accumulated depreciation of $47,081 (2011) and $44,025( 2010)			51,182				7,285
		$	164,450				1,187,072
Liabilities and Stockholders’ Deficit
Current liabilities:
Accounts payable, including related party payables of $16,074 (2011) and $87,707 (2010)		$	119,321			$	162,281
Accrued agency fee							900,000
Accrued interest			14,718				14,718
Accrued payroll			6,000				4,635
Note payable			500				500
Total current liabilities			140,539				1,082,134
Accrued expenses – long term			307,250				273,250
Accrued payroll – long term			550,633				270,376
Accrued royalty fees			1,239,000				1,051,500
Note payable to related party			6,901				1,901
Total liabilities			2,244,323				2,679,161
Stockholders’ deficit:
Preferred stock; $.001 par value; 1,000,000 shares authorized; 0 shares issued and outstanding
Common stock; $.001 par value; 99,000,000 shares authorized; 53,874,445 (2011) and 45,844,161 (2010) shares issued and outstanding			53,874				45,842
Additional paid in capital			13,832,104				12,526,812
Deficit accumulated during development stage			(15,954,096	)			(14,133,147	)
Common stock payable			214,000				274,000
Prepaid consulting services paid with common stock			(13,755	)			(193,596	)
Receivable for common stock			(212,000	)			(12,000	)
Total stockholders’ deficit			(2,079,873	)			(1,492,089	)
		$	164,450			$	1,187,072

The accompanying notes are an integral part of the financial statements.

 

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Turbine Truck Engines, Inc.

(A Development Stage Company)

Statements of Operations

(unaudited)

 

		Three Months Ended September 30,								Nine Months Ended September 30,								Period November 27, 2000 (Date of Inception) through September 30, 2011
		2011				2010				2011				2010
Research and development costs		$				$	53,939			$	103,432			$	179,679			$	3,839,147
Operating costs			501,402				27,658				1,710,529				1,726,323				11,505,184
			501,402				81,597				1,813,961				1,906,002				15,344,331
Interest (income) expense							168,692				6,988				203,012				609,765
Net loss		$	(501,402	)		$	(250,289	)		$	(1,820,949	)		$	(2,109,014	)		$	(15,954,096	)
Net loss per share			(0.01	)		$	(0.01	)		$	(0.04	)		$	(0.05	)		$	(0.81	)
Weighted average number of common shares outstanding			53,036,748				43,764,566				50,660,640				42,410,469				19,649,529

The accompanying notes are an integral part of the financial statements.

 

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Turbine Truck Engines, Inc.

(A Development Stage Company)

Statements of Cash Flows

 

		For the Nine Months Ended								Period November 27, 2000 (Date of Inception) through
		September 30, 2011				September 30, 2010				September 30, 2011
		(unaudited)				(unaudited)				(unaudited)
OPERATING ACTIVITIES:
Net loss		$	(1,820,949	)		$	(2,109,014	)		$	(15,954,096	)
Adjustments to reconcile net loss to net cash used in operating activities:
Common stock and long-term debt issued for acquisition of license agreement											2,735,649
Common stock issued for services and amortization of common stock issued for services			834,532				336,654				4,320,480
Options and warrants issued to employees, directors and consultants											614,287
Contribution from shareholder											188,706
Amortization of beneficial conversion feature			7,000				205,436				531,561
Amortization of deferred loan costs											24,750
Write off of deferred offering costs											119,383
Write off of deferred non cash offering costs											49,120
Gain on disposal of fixed assets											(1,965	)
Depreciation			3,056				3,516				50,164
Amortization of agency fee			42,632								100,000
Amortization of discount on notes payable											33,858
Increase in prepaid expenses			4,227				(111,211	)			(104,665	)
Increase (decrease) in:
Accounts payable			47,354				100,283				299,760
Accrued expenses			34,000				31,753				307,250
Accrued payroll			296,622				(59,292	)			571,633
Accrued royalty fees			187,500				187,500				1,655,667
Accrued interest							369				14,718
Net cash used by operating activities			(364,026	)			(1,414,006	)			(4,443,740	)
INVESTING ACTIVITIES:
Payment of agency fee rights											(100,000	)
Issuance of notes receivable from stockholders											(23,000	)
Repayment of notes receivable from stockholders											22,095
Advances to related party											805
Proceeds from sale of fixed assets											2,500
Purchase of fixed assets			(46,954	)			(4,459	)			(96,883	)
Net cash used by investing activities			(46,954	)			(4,459	)			(194,483	)
FINANCING ACTIVITIES:
Repayment of stockholder advances											(157,084	)
Advances from stockholders			5,000								271,152
Increase in deferred offering costs											(194,534	)
Proceeds from issuance of common stock			236,320				912,317				3,872,793
Proceeds from exercise of options											45,000
Debt issuance costs											(19,750	)
Repayment of convertible notes payable											(23,000	)
Proceeds from issuance of convertible notes payable			50,000				250,000				852,250
Net cash provided by financing activities			291,320				1,162,317				4,646,827
NET (DECREASE) INCREASE IN CASH			(119,660	)			(256,148	)			8,604
CASH, BEGINNING OF PERIOD			128,264				603,601
CASH, END OF PERIOD		$	8,604			$	347,453			$	8,604

The accompanying notes are an integral part of the financial statements

 

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		For the Nine Months Ended								Period November 27, 2000 (Date of Inception) through
		September 30, 2011				September 30, 2010				September 30, 2011
		(unaudited)				(unaudited)				(unaudited)
Supplemental disclosures of cash flow information and noncash investing and financing activities:
Cash paid for interest		$				$				$	21,477
Subscription receivable for issuance of common stock		$				$				$	29,090
Option to acquire license for issuance of common stock		$				$				$	10,000
Deferred offering costs netted against issuance of common stock under private placement		$				$				$	33,774
Deferred offering costs netted against issuance of common stock		$				$				$	41,735
Value of beneficial conversion feature of notes payable		$				$				$	19,507
Deferred non-cash offering costs in connection with private placement		$				$				$	74,850
Application of amount due from shareholder against related party debt		$				$				$	8,099
Amortization of offering costs related to stock for services		$				$				$	25,730
Settlement of notes payable in exchange for common stock		$				$				$	356,466
Common stock issued in exchange for prepaid services		$				$	312,150			$	2,245,164
Common stock issued in exchange for accrued royalties		$				$				$	416,667
Receivable issued for exercise of common stock options		$	200,000			$				$	367,000
Common stock issued in exchange for fixed assets		$				$				$	5,000
Acquisition of agency fee intangible through accrued expenses		$				$				$	900,000
Beneficial conversion feature on convertible notes		$	7,000			$	248,889			$	531,561
Conversion of convertible debt to equity (7,340,152 shares since inception)		$	50,000			$	175,000			$	772,000
Common stock issued for accounts payable		$	90,313			$	55,125			$	180,438
Common stock issued for accrued payroll		$	15,000			$	202,000			$	15,000
Write off uncollectible stock subscription receivable		$				$	155,000			$	155,000
Write off of intangible asset and agency fee payable		$	900,000			$				$	900,000

The accompanying notes are an integral part of the financial statements.

 

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Turbine Truck Engines, Inc.

(A Development Stage Enterprise)

Notes to Financial Statements

For the Nine Months Ended September 30, 2011 and 2010 (unaudited)

and the Period November 27, 2000 (Date of Inception)

through September 30, 2011 (unaudited)

1. Background Information

Turbine Truck Engines, Inc. (the “Company”) is a development stage enterprise that was incorporated in the state of Delaware on November 27, 2000, and converted to a Nevada corporation. To date, the Company’s activities have been limited to raising capital, organizational matters, and the structuring of its business plan. The corporate headquarters is located in Paisley, Florida. The Company’s planned line of business will be the design, development, and testing of turbine truck engine technology licensed through Alpha Engines Corporation (“Alpha”). Alpha owns the patents to a new gas turbine engine system called Detonation Cycle Gas Turbine Engine. If the Company can successfully demonstrate a highway truck engine using the technology, the Company intends to form a joint venture with a major heavy duty highway truck manufacturer to manufacture, market, and sell turbine truck engines for use in heavy duty highway trucks throughout the United States.

2. Financial Statements

In the opinion of management, all adjustments consisting only of normal recurring adjustments necessary for a fair statement of (a) the results of operations for the three and nine month periods ended September 30, 2011 and 2010 and the period November 27, 2000 (Date of Inception) through September 30, 2011, (b) the financial position at September 30, 2011, 2010, and (c) cash flows for the nine month periods ended September 30, 2011 and 2010, and the period November 27, 2000 (Date of Inception) through September 30, 2011, have been made.

The unaudited financial statements and notes are presented as permitted by Form 10-Q. Accordingly, certain information and note disclosures normally included in the financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted. The accompanying financial statements and notes should be read in conjunction with the audited financial statements and notes of the Company for the fiscal year ended December 31, 2010. The results of operations for the three and nine month periods ended September 30, 2011 are not necessarily indicative of those to be expected for the entire year.

3. Going Concern

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. For the three and nine months ended September 30, 2011 and since November 27, 2000 (date of inception) through September 30, 2011, the Company has had a net loss of $501,402, $1,820,949 and $15,954,096, respectively. As of September 30, 2011, the Company has not emerged from the development stage and has a working capital deficit of $27,271. In view of these matters, the Company’s ability to continue as a going concern is dependent upon the Company’s ability to begin operations and to achieve a level of profitability. Since inception, the Company has financed its activities principally from the sale of public equity securities. The Company intends on financing its future development activities and its working capital needs largely from the sale of public equity securities with some additional funding from other traditional financing sources, including term notes and proceeds from sub-licensing agreements until such time that funds provided by operations are sufficient to fund working capital requirements. The financial statements of the Company do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classifications of liabilities that might be necessary should the Company be unable to continue as a going concern.

4. Commitments and Contingencies

On February 1, 2006, the Company entered into an agreement with Embry-Riddle Aeronautical University to complete a 3D model and certain modifications to the original Detonation Gas Turbine Engine in exchange for a

 

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fixed price amount. The Company has expensed $10,670 related to this agreement which expired on June 30, 2007. On August 31, 2007, the Company extended the original agreement through December 31, 2009 with a total additional amount not to exceed approximately $297,000. The Company incurred approximately $0 and $28,000 in additional costs during the three and nine months ended September 30, 2011, respectively.

Once the Company becomes operational, it will be obligated to pay production royalties to Alpha at the rate of eight percent of net sales of the Detonation Cycle Gas Turbine Engine. The minimum royalty amount is $250,000 per year, and the Company began accruing for the fee in February 2005. The royalty fee will be reduced by production royalties paid. Unpaid royalty fees amounted to $1,239,000 and $1,051,500 as of September 30, 2011 and December 31, 2010, respectively.

The Company entered into a Share Purchase Agreement in May 2010 with Hua Tec Enterprise Co. LTD, an international company incorporated in the Independent State of Samoa. HUA TEC owns all of the issued and outstanding shares of Guandong Kingtec Electrical Co., LTD, a wholly foreign owned enterprise established under the laws of the People’s Republic of China. Kingtec is primarily engaged in the business of manufacturing and selling automobile starters, generators and other accessories in the People’s Republic of China. The closing of this purchase agreement is contingent upon certain conditions as outlined in the agreement and is currently being negotiated.

The Company (TTE) entered into a Cooperation Agreement (the “Agreement”) with Hydrogen Union Energy Co., Ltd. (“HUE”) for the purpose of the joint development of the hydrogen generator. Under the terms of the Agreement, HUE will provide hydrogen generators at cost to TTE for demonstration purposes. Once TTE purchases the first H2 generator and pays 90% of the purchase price, TTE will be given first refusal to act as agent for any future business relating to hydrogen generators with HUE’s technology in North America. TTE will pay the cost of production of a 200 cubic meter H2 generator at 10,000,000 TWD ($346,000 USD as of September 30, 2011) for up to two machines. Payments are to be made in stages; (a) 50% (5,000,000 TWD) within 15 business days after the execution of the Agreement; (b) 40% (4,000,000 TWD) 30 days after the first payment; (c) 5% (500,000 TWD) 24 hours after the initial installation and testing; and (d) 5% (500,000 TWD) one day after machine is in operation for 30 days. Through the date of this filing, the Company is working to negotiate a payment schedule.

As a September 30, 2011, the above equipment has not been received , as such, no liability has been recorded.

The Company entered into a Cooperative Agreement (the “Agreement”) dated April 27, 2010 with Beijing Royal Aerospace Facilities Co., Ltd., a PRC corporation (“Beijing Royal”), for the purpose of providing a framework for the collaboration between the two companies on the development and commercialization of the Detonation Cycle Gas Turbine Engine (“DGCT”) specifically for application to heavy duty trucks, with Beijing Royal to be the Company’s exclusive development partner with respect to 300 – 600 HP DCGT in the People’s Republic of China. The parties have agreed to execute a more detailed joint development contract upon the approval of the DCGT project by PRC regulatory authorities to specify the details of their cooperation on the development of the DCGT.

The Agreement further provides that all documentation provided by the Company to Beijing Royal at this stage shall be solely for the purpose of making a funding application, and that any further use shall be by agreement of the parties. The intellectual properties jointly developed under the Agreement would be owned by both parties equally.

The Company entered into various strategic alliances with foreign companies during 2009. During the nine months ended September 30, 2011, there were no material changes as disclosed in the December 31, 2010 Form 10K which would warrant further disclosure to these financial statements. The agreements with GUOHAO, TIANJIN, and BEIJING ROYAL are based on the company building, testing, and demonstrating a prototype that will meet the efficiencies required to commercialize the engine for their respective products. Once the company has demonstrated that it can produce an engine with the power output and efficiencies required, the time line set in the original agreements for the respective companies to fulfill their agreements and fund the company to bring the engine to full commercialization for that product will start at that time.

Related to certain employment agreements, the Company issued a total of 1,100,000 shares of common stock. The Company entered into new employment agreements effective October 1, 2011 that superseded any outstanding employment contracts making shares of stock fully vested through nine months ended September 30, 2011. The Company accelerated stock compensation expense related to these agreements and recognized approximately $106,000 and $194,000 for the three and nine months ended September 30, 2011, respectively, related to the previous employment agreements.

 

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In October 2011, the Company entered into employment agreements with terms that commence on October 1, 2011 and run through a range of dates with the latest being September 2014. These agreements have a cumulative annual salary of approximately $156,000 annually and cumulative grants of fully vested stock issuances of 850,000 shares of stock. Additionally, the employees covered in these agreements are also granted options allowing holders to convert a cumulative amount of 850,000 shares for a term of five years with a exercise price of $0.25.

5. Related Party Transactions

During the year ended December 31, 2003, the Company signed a note payable with a related party in the amount of $15,000. The balance at September 30, 2011 and December 31, 2010 is $1,901. This note payable was unsecured, non-interest bearing and has no specific repayment terms, however, payment is not expected prior to September 30, 2012.

During the three months ended September 30, 2011, the Company received an advance of $5,000 from a stockholder. The advance was unsecured non-interest bearing and has no specific repayment terms, however payment isn’t expected prior to September 30, 2012.

As of September 30, 2011 and December 31, 2010, accounts payable included $3,854 and $47,557 due to a Company owned by the Company’s Chief Technology Officer.

As of September 30, 2011 and December 31, 2010, accounts payable included $12,220 and $40,150, respectively, due to a director of the Company for various accounting services.

The above terms and amounts are not necessarily indicative of the terms and amounts that would have been incurred had comparable transactions been entered into with independent parties.

6. Convertible Note Payable

In June 2008, the Company issued a Convertible Debenture to Golden Gate Investors, Inc. (the “holder”) in the principal amount of $1,000,000, dated June 6, 2008, pursuant to Rule 506 promulgated by the Securities and Exchange Commission, for the purpose of accessing necessary funding to continue operations.

Pursuant to the terms of the Debenture, the related Securities Purchase Agreement, Secured Promissory Note and Stock Pledge Agreement, each executed in connection therewith, the Company has issued its $1,000,000 Convertible Debenture (the “Debenture”) for the payment by Golden Gate of $100,000 in cash and the execution and delivery by Golden Gate of a $900,000 Secured Promissory Note of even date (the “Note”), bearing interest at 8% per annum. For financial statement purposes, these items have been netted, as the Company has the legal right of offset.

The Debenture bears interest at 7.75% per annum, payable monthly, maturing June 30, 2012, and was secured by a Continuing Personal Guaranty, whereby the Company’s Chief Executive Officer and majority shareholder guaranteed the Company’s obligations for a period of eight months. Originally, the Debenture Holder was entitled to convert into common stock of the company at the conversion price equal to the lesser of (i) $0.50, or (ii) 80% of the average of the 3 lowest Volume Weighted Average Prices during the 20 Trading Days prior to Holder’s election to convert, as such terms are defined in the Debenture. The Holder can only convert that amount of the Debenture that has actually been paid for by either cash at closing or principal pre-payments made on the Promissory Note.

During 2011 and since inception, the Company has drawn $50,000 and $795,000 in proceeds related to the note, respectively. During 2011 and since inception, the Holder has converted $50,000 and $747,000 in convertible notes into 333,334 and 7,340,152 common shares, respectively.

In December 2009, the convertible debenture agreement was amended. As a result of the amendment, effective January 15, 2010, the conversion price has a $0.15 fixed floor price that limits the number of common shares upon conversion to an amount that is substantially below the Company’s authorized common shares that can be issued. Additionally, the penalty associated with the default provision to maintain timely filings of all reports required by the Securities and Exchange Commission was removed. Lastly, the default provision related to the interest rate adjustment indexed to changes in the Company’s common stock was removed. In the event of certain defaults, the Company would pay a default fixed interest rate of 9.75% per annum.

 

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Based on the amended agreement, the Company determined that all potential derivative features associated with the original debenture agreement were removed.

The following table presents the activity during 2011 related to the debenture:

 

Principal balance of the debenture		$	50,000
Less reduction for:
Intrinsic value of beneficial conversion feature			(7,000	)
Recorded at closing		$	43,000
Amounts converted into common stock			(50,000	)
Amortization of beneficial conversion feature (interest expense) through September 30, 2011			7,000
Carrying value at September 30, 2011		$	0

7. Options and warrants

The Company’s 2006 Incentive Compensation Plan authorizes up to 2,000,000 shares of common stock to any employee or Consultant during any one calendar year for grants of both incentive stock options and non-qualified stock options to key employees, officers, directors, and consultants. Options granted under the Plan must be exercised within a term determined by the Board of Directors. The Option Price payable for the shares of Common Stock covered by any Option shall be determined by the Board of Directors, provided that such exercise price shall not be less than 100% of the Fair Market Value of a Share on the date of grant of the Option and shall not, in any event, be less than the par value of a Share on the date of grant of the Option. The Company granted 0 options from this plan.

The Company’s 2008 Incentive Compensation Plan authorizes up to 5,000,000 shares of common stock to employees or the consultants, unless contained in the written award approved by the Board of Directors. As of September 30, 2011, The Company granted 800,000 and 1,600,000 options to consultants during the three and nine month periods ended September 30, 2011, respectively.

The Company’s 2011 Incentive Compensation Plan authorizes up to 5,000,000 shares of common stock to employees or the consultants, unless contained in the written award approved by the Board of Directors. As of September 30, 2011, The Company has not granted any options from this plan.

The fair value of each option under the 2006, and 2008 Incentive Compensation Plan was estimated on the date of grant using the Black Scholes model that uses assumptions noted in the following table. Expected volatility is based on the Company’s historical market price at consistent points in periods equal to the expected life of the options. The expected term of options granted is based on the Company’s historical experience. The risk-free interest rate for the periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The Company estimates forfeitures; both at the date of grant as well as throughout the requisite service period, based on the Company’s historical experience and future expectations.

The aggregate intrinsic value of options outstanding and exercisable at September 30, 2011, based on the Company’s closing stock price of $0.10 was $0. The aggregate intrinsic value of options outstanding and exercisable at September 30, 2010, based on the Company’s closing stock price of $0.20 was $90,000. Intrinsic value is the amount by which the fair value of the underlying stock exceeds the exercise price of the options.

During the three months ended September 30, 2011 and 2010, the Company issued 0 and 0 options and warrants, respectively, in conjunction with the issuance of common stock. During the nine months ended September 30, 2011 and 2010, the Company issued 800,000 and 33,000 options and warrants, respectively, in conjunction with the issuance of common stock. The warrants entitle the holder to purchase 800,000 and 33,000 shares of the Company’s common stock, respectively, at any time, at an exercise price of $0.30 per share.

 

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The following table represents our stock option and warrant activity for the nine months ended September 30, 2011:

 

		Shares				Range of Exercise Prices				Weighted Average Grant Date Fair Value
Outstanding and Exercisable
Outstanding at December 31, 2010			3,215,413			$	0.10 – 2.00
Options and warrants granted			1,600,000			$	0.15 – 0.30			$	0.23
Options and warrants exercised
Options and warrants cancelled or expired			(260,000	)		$	2.00
Outstanding at September 30, 2011			4,555,413			$	0.10 – 1.00
Exercisable at September 30, 2011			4,555,413			$	0.10 – 1.00

The following table summarizes information about options and warrants outstanding and exercisable as of September 30, 2011:

 

		Outstanding Options and Warrants												Exercisable Options and Warrants
Range of Exercise Price		Number Outstanding				Weighted Average Remaining Life				Weighted Average Price				Weighted Average Remaining Life				Number Exercisable				Weighted Average Price
$0.10 - $1.00			4,555,413				3.96			$	0.29				3.96				4,555,413			$	0.29

Net cash proceeds from the exercise of options and warrants were $0 for each of the nine months ended September 30, 2011 and 2010.

8. Earnings per Share

Basic loss per share is computed by dividing net loss attributable to common stockholders by the weighted average common shares outstanding for the period. Diluted loss per share is computed giving effect to all potentially dilutive common shares. Potentially dilutive common shares may consist of incremental shares issuable upon the exercise of stock options and warrants and the conversion of notes payable to common stock. In periods in which a net loss has been incurred, all potentially dilutive common shares are considered antidilutive and thus are excluded from the calculation. For the nine month periods ended September 30, 2011 and 2010 and for the period from November 27, 2000 (Date of Inception) through September 30, 2011, the Company had 4,555,413, 2,690,413 and 4,555,413 potentially dilutive common stock options and warrants, respectively, which were not included in the computation of loss per share.

 

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ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

THIS FILING CONTAINS FORWARD-LOOKING STATEMENTS. THE WORDS “ANTICIPATED,” “BELIEVE,” “EXPECT,” “PLAN,” “INTEND,” “SEEK,” “ESTIMATE,” “PROJECT,” “WILL,” “COULD,” “MAY,” AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. THESE STATEMENTS INCLUDE, AMONG OTHERS, INFORMATION REGARDING FUTURE OPERATIONS, FUTURE CAPITAL EXPENDITURES, AND FUTURE NET CASH FLOW. SUCH STATEMENTS REFLECT THE COMPANY’S CURRENT VIEWS WITH RESPECT TO FUTURE EVENTS AND FINANCIAL PERFORMANCE AND INVOLVE RISKS AND UNCERTAINTIES, INCLUDING, WITHOUT LIMITATION, GENERAL ECONOMIC AND BUSINESS CONDITIONS, CHANGES IN FOREIGN, POLITICAL, SOCIAL, AND ECONOMIC CONDITIONS, REGULATORY INITIATIVES AND COMPLIANCE WITH GOVERNMENTAL REGULATIONS, THE ABILITY TO ACHIEVE FURTHER MARKET PENETRATION AND ADDITIONAL CUSTOMERS, AND VARIOUS OTHER MATTERS, MANY OF WHICH ARE BEYOND THE COMPANY’S CONTROL. SHOULD ONE OR MORE OF THESE RISKS OR UNCERTAINTIES OCCUR, OR SHOULD UNDERLYING ASSUMPTIONS PROVE TO BE INCORRECT, ACTUAL RESULTS MAY VARY MATERIALLY AND ADVERSELY FROM THOSE ANTICIPATED, BELIEVED, ESTIMATED, OR OTHERWISE INDICATED. CONSEQUENTLY, ALL OF THE FORWARD-LOOKING STATEMENTS MADE IN THIS FILING ARE QUALIFIED BY THESE CAUTIONARY STATEMENTS AND THERE CAN BE NO ASSURANCE OF THE ACTUAL RESULTS OR DEVELOPMENTS.

The following discussion and analysis of our financial condition and plan of operations should be read in conjunction with our financial statements and related notes appearing elsewhere herein. This discussion and analysis contains forward-looking statements including information about possible or assumed results of our financial conditions, operations, plans, objectives and performance that involve risk, uncertainties and assumptions. The actual results may differ materially from those anticipated in such forward-looking statements. For example, when we indicate that we expect to increase our product sales and potentially establish additional license relationships, these are forward-looking statements. The words expect, anticipate, estimate or similar expressions are also used to indicate forward-looking statements.

OVERVIEW OF THE COMPANY

We are a development-stage company and not yet generating any revenues. We expect to continue the commercialization of our Detonation Cycle Gas Turbine Engine (“DCGT”) technology. The licensor of the acquired technology has passed the research and development phase and has designed a working prototype. We need to redesign an engine for our application based on this proven Core Technology. We are relying on AbM Engineering in collaboration with AMEC to design, construct and test a 540 horsepower engine prototype for our licensed application.

The financing for our development activities to date has come from the sale of common stock. We intend to finance our future development activities and working capital needs largely from the sale of public equity securities with additional funding from a private placement or secondary offering of up to $10 million and other traditional financing sources, including term notes and proceeds from sub-licensing agreements until such time that funds provided by operations are sufficient to fund working capital requirements.

Since we have had a limited history of operations, we anticipate that our quarterly results of operations will fluctuate significantly for the foreseeable future. We believe that period-to-period comparisons of our operating results should not be relied upon as predictive of future performance. Our prospects must be considered in light of the risks, expenses and difficulties encountered by companies at an early stage of development, particularly companies commercializing new and evolving technologies such as the DCGT. In July 2002, we acquired the license for the DCGT technology for the manufacture and marketing of heavy-duty highway truck engine.

 

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For the three months ended September 30, 2011 compared to the three months ended September 30, 2010

Research and Development Costs – During the three months ended September 30, 2011 and 2010, research and development costs totaled $0 and $53,939, respectively. The decrease of $53,939 was mainly attributable to costs incurred for the Company’s Chief Technology Officer during the three months ended September 30, 2010.

Operating Costs – During the three months ended September 30, 2011 and 2010, operating costs totaled $501,402 and $27,658, respectively. The increase of $473,744 was mainly attributable to an approximate $371,000 increase in consulting expense, $56,000 increase in payroll expenses and an approximate $99,000 increase in stock based compensation expense.

Interest (Income) Expense—Net—During the three months ended September 30, 2011 and 2010, net interest expense totaled $0 and $168,692, respectively. The decrease of $168,692 was primarily due to the Company issuing no convertible debentures to Golden Gate Investors, Inc. during the three months ended September 30, 2011.

The net loss for the three months ended September 30, 2011 and 2010 was $501,402 and $250,289, respectively. The decrease of $251,113 was mainly attributable to the increase in operating costs.

For the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010

Research and Development Costs – During the nine months ended September 30, 2011 and 2010, research and development costs totaled $103,432 and $179,679, respectively. The decrease of $76,247 was mainly attributable to a reduction of costs incurred for the testing of the DCGT engine in 2011.

Operating Costs – During the nine months ended September 30, 2011 and 2010, operating costs totaled $1,710,529 and $1,726,323, respectively. The decrease of $15,794 was mainly attributable to decrease in consulting expenses.

Interest (Income) Expense—Net—During the nine months ended September 30, 2011 and 2010, net interest expense totaled $6,988 and $203,012, respectively. The decrease of $196,024 was primarily due to the Company issuing less convertible debentures to Golden Gate Investors, Inc. of $50,000 in 2011 compared to $253,000 in 2010.

The net loss for the nine months ended September 30, 2011 and 2010 was $1,820,949 and $2,109,014, respectively. The decrease of $288,065 was mainly attributable to the decrease in interest expense.

Liquidity and capital resources

As shown in the accompanying financial statements, for the nine months ended September 30, 2011 and 2010 and since November 27, 2000 (date of inception) through September 30, 2011, the Company has had net losses of $501,402, $1,820,949 and $15,954,096, respectively. As of September 30, 2011, the Company has not emerged from the development stage. In view of these matters, the Company’s ability to continue as a going concern is dependent upon the Company’s ability to begin operations and to achieve a level of profitability. However, there can be no assurance that the Company will be able to raise capital or begin operations to achieve a level of profitability to continue as a going concern. Since inception, the Company has financed its activities principally from the sale of public equity securities. The Company intends on financing its future development activities and its working capital needs largely from the sale of public equity securities with some additional funding from other traditional financing sources, including term notes and proceeds from sub-licensing agreements until such time that funds provided by operations are sufficient to fund working capital requirements.

As previously mentioned, since inception, we have financed our operations largely from the sale of common stock. From inception through September 30, 2011 we raised cash of approximately $3,678,000 net of issuance costs, through private placements of common stock financings and $795,000 through the issuance of convertible notes payable. Additionally, we have raised net proceeds from stockholder advances of approximately $114,000.

Since our inception through September 30, 2011 we have incurred $3,839,147 of research and development costs. These expenses were principally related to the acquisition of a license agreement in July 2002 in the amount of $2,735,649, which was expensed to research and development costs for the DCGT technology and general and administrative expenses.

We have incurred significant net losses and negative cash flows from operations since our inception. As of September 30, 2011, we had an accumulated deficit of $15,954,096 and working capital deficit of $27,271.

 

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We anticipate that cash used in product development and operations, especially in the marketing, production and sale of our products, will increase significantly in the future.

On June 6, 2008, the Company issued a 7  ³/4 Convertible Debenture to Golden Gate Investors, Inc. in the principal amount of $1,000,000, pursuant to Rule 506 promulgated by the Securities and Exchange Commission, for the purpose of accessing necessary funding to continue operations.

Pursuant to the terms of the Debenture, the related Securities Purchase Agreement, secured Promissory Note and Stock Pledge Agreement, each executed in connection therewith, the Company issued $1,000,000 Convertible Debenture (the “Debenture”) for the payment by Golden Gate of $100,000 in cash and the execution and delivery by Golden Gate of a $900,000 Secured Promissory Note of even date (the “Note”), bearing interest at 8% per annum.

The Debenture bears interest at 7.75% per annum, payable monthly, maturing June 30, 2012, and is secured by a Continuing Personal Guaranty by Michael H. Rouse, the Company’s CEO. Originally, the Holder was entitled to convert into common stock of the company at the conversion price equal to the lesser of (i) $0.50, or (ii) 80% of the average of the 3 lowest Volume Weighted Average Prices during the 20 Trading Days prior to Holder’s election to convert, as such terms are defined in the Debenture. Effective January 15, 2010 the agreement was amended with the Holder and the conversion price having a $0.15 fixed floor price that limits the number of common shares upon conversion of a fixed amount. The Holder can only convert that amount of the Debenture that has actually been paid for by either cash at closing or principal pre-payments made on the Promissory Note.

Golden Gate’s secured Promissory Note is payable at the rate of 8% per annum, payable monthly and provides that for the prepayment of the Note in an amount not less than $200,000 monthly upon the happening of certain events. It matures on June 30, 2012. During 2011 and since inception, the Company has drawn $50,000 and $795,000, respectively, in proceeds related to the note. During 2011 and since inception, the Holder has converted $50,000 and $772,000 in convertible notes into 333,334 and 7,340,152 common shares, respectively.

Provided certain conditions are met, pursuant to the terms of the Securities Purchase Agreement executed between the parties, Golden Gate or its assigns has the right to enter into 4 additional Debentures with the Company upon similar terms. The Company incurred no additional expenses in this matter and the Company is utilizing the proceeds for its on-going working capital needs.

We will be dependent upon our existing cash, together with anticipated net proceeds from a public offering and future debt issuances and private placements of common stock and potential license fees, to finance our planned operations through the next 12 months. We will continue to proceed in the design and testing phase of the DCGT engine during the next 12 months and will require additional funding to continue operations. Based on our anticipated growth, we plan to add several employees to our staff.

Additional capital may not be available when required or on favorable terms. If adequate funds are not available, we may be required to significantly reduce or refocus our operations or to obtain funds through arrangements that may require us to relinquish rights to certain or potential markets, either of which could have a material adverse effect on our business, financial condition and results of operations. To the extent that additional capital is raised through the sale of equity or convertible debt securities, the issuance of such securities would result in ownership dilution to our existing stockholders.

The Company may receive proceeds in the future from the exercise of warrants and options outstanding as of September 30, 2011 in accordance with the following schedule:

 

		Approximate Number of Shares				Approximate Proceeds*
2006 Non-Plan Options and Warrants			4,555,413			$	1,331,533

 

*	Based on weighted average exercise price.

 

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Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

We believe that the following critical policies affect our more significant judgments and estimates used in preparation of our financial statements.

We account for stock option grants in accordance with US GAAP. Stock-based compensation cost recognized during the periods ended September 30, 2011 and 2010 includes compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006 and compensation cost for all share-based payments granted subsequent to January 1, 2006, based on their relative grant date fair values estimated in accordance with US GAAP. The Company recognizes compensation expenses on a straight-line basis over the requisite service period.

Determination of the fair values of stock option grants at the grant date requires judgment, including estimating the expected term of the relevant grants and the expected volatility of the Company’s stock. Additionally, management must estimate the amount of stock option grants that are expected to be forfeited. The expected term of options granted represents the period of time that the options are expected outstanding and is based on historical experience of similar grants, giving consideration to the contractual terms of the grants, vesting schedules and expectations of future employee behavior. The expected volatility is based upon our historical market price at consistent points in a period equal to the expected life of the options. Expected forfeitures are based on historical experience and expectations of future employee behavior.

Furniture and equipment are recorded at cost and depreciated on a declining balance and straight-line basis over their estimated useful lives, principally two to seven years. Accelerated methods are used for tax depreciation. Maintenance and repairs are charged to operations when incurred. Betterments and renewals are capitalized. When furniture and equipment are sold or otherwise disposed of, the asset account and related accumulated depreciation account are relieved, and any gain or loss is included in operations. The Company records capital assets, however depreciation does not begin until the assets are placed in service.

The Company has incurred deferred offering costs in connection with raising additional capital through the sale of its common stock. These costs are capitalized and charged against additional paid-in capital when common stock is issued. If there is no issuance of common stock, the costs incurred are charged to operations.

Research and development costs are charged to operations when incurred and are included in operating expenses.

New Accounting Pronouncements

The Company’s management does not believe that any recent codified pronouncements by the FASB will have a material impact on the Company’s current or future financial statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

Item 4T. Controls and Procedures

The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of and for the period covered by this Quarterly Report on Form 10-Q. Based upon such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures were not effective. The controls were determined to be ineffective due to the lack

 

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of segregation of duties. Currently, management contracts with an outside CPA to perform the duties of the Chief Financial Officer and Principle Accounting Officer and an outside consultant to assist with the preparation of the filings. However, until the Company has received additional funding, they are unable to remediate the weakness.

Changes in Internal Control Over Financial Reporting

No change in the Company’s internal control over financial reporting occurred during the three and nine months ended September 30, 2011, that materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings

As of the date of this Quarterly Report, neither we nor any of our officers or directors is involved in any litigation either as plaintiffs or defendants. As of this date, there is not any threatened or pending litigation against us or any of our officers or directors.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

During the three and nine month periods ended September 30, 2011, there was no modification of any instruments defining the rights of holders of the Company’s common stock and no limitation or qualification of the rights evidenced by the Company’s common stock as a result of the issuance of any other class of securities or the modification thereof.

During July 2011, the Company issued 169,734 shares of common stock for relief of accounts payable valued at a price of $0.14 per share.

During July 2011, the Company issued 200,000 shares of common stock for cash valued at a price of $0.10 per share.

During July 2011, the Company issued 250,000 shares of common stock for services at a price of $0.14 per share.

During August 2011, the Company issued 130,000 shares of common stock for cash valued at a price of $0.08 per share.

During September 2011, the Company issued 2,000 shares of common stock for cash valued at a price of $0.18 per share.

During September 2011, the Company issued 9,615 shares of common stock for cash valued at a price of $0.10 per share.

In connection with the above sales, the Company relied on the exemption provided by Section 4 (2) of the Securities Act of 1933 as amended under Rule 506 under the Act.

Item 3. Defaults upon Senior Securities

There have been no defaults in any material payments during the covered period.

Item 4. Removed and Reserved

Item 5. Other Information

The Company does not have any other material information to report with respect to the three and nine month periods ended September 30, 2011.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits included herewith are:

 

31.1		Certification of the Chairman of the Board, Chief Executive Officer, and Principal Financial Officer This certification required as Exhibit 31 under Item 601(a) of Regulation S-K
31.2		Certification of the Principal Accounting Officer (This certification required as Exhibit 31 under Item 601(a) of Regulation S-K

 

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32.1		Written Statements of the Chief Executive Officer, This certification required as Exhibit 32 under Item 601(a) of Regulation S-K is furnished in accordance with Item 601(b)(32)(iii) of Regulation S-K
32.2		Written Statements of the Chief Financial Officer and Principal Accounting Officer This certification required as Exhibit 32 under Item 601(a) of Regulation S-K is furnished in accordance with Item 601(b)(32)(iii) of Regulation S-K
101.INS **		XBRL Instance Document
101.SCH **		XBRL Taxonomy Extension Schema Document
101.CAL **		XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB **		XBRL Taxonomy Extension Label Linkbase Document
101.PRE **		XBRL Taxonomy Extension Presentation Linkbase Document

 

**

XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

 

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SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned, thereto duly authorized:

 

				TURBINE TRUCK ENGINES, INC.
Dated: November 21, 2011				/S/ MICHAEL ROUSE
				Chief Executive Officer and Chairman of the Board (Principal Executive Officer and Principal Financial Officer)
Dated: November 21, 2011				/S/ REBECCA A. MCDONALD
				Principal Accounting Officer

 

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