UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-K
For the fiscal year ended December 31, 2008
For the transition period from , 20 , to , 20 .
Commission File Number
333-109118
Turbine Truck Engines, Inc.
(Exact Name of Registrant as Specified in its Charter)
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification Number)
917 Biscayne Boulevard Suite 6, Deland, Florida 32724
(Address of Principal Executive Offices)
(386) 943-8358
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(g) of the Act:
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ¨ YES x NO
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ¨ YES x NO
Indicate by check mark 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 past 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. x YES ¨ NO
Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “accelerated filer and large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act) ¨ YES x NO
The Aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter, June 30, 2008 was $1,456,388.
There were 21,859,764 shares of the Registrant’s $.001 par value common stock outstanding as of December 31, 2008.
TURBINE TRUCK ENGINES, INC.
FORM 10-K INDEX
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This Annual Report on Form 10-K and the documents incorporated herein by reference contain forward-looking statements that have been made pursuant to the provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based on current expectations, estimates and projections about Turbine Truck Engines Inc.’s industry, management beliefs, and assumptions made by management. Words such as “anticipates,” “expects,” “intends,” “plans,” ”believes,” “seeks,” “estimates,” variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict; therefore, actual results and outcomes may differ materially from what is expressed or forecasted in any such forward-looking statements.
PART I
Turbine Truck Engines, Inc. was incorporated in Delaware on November 27, 2000. On February 20, 2008, the Company was re-domiciled to the State of Nevada. On December 15, 2000, we acquired the option rights for an exclusive License from Alpha Engines Corporation (“Alpha”) for manufacturing and marketing heavy duty highway truck engines utilizing Alpha’s “Detonation Cycle Gas Turbine Engine” (“DCGT”) technology embodied in U.S. Patent No. 6,000,214 and other proprietary technology and rights owned by Alpha including Marketing Survey Data in the highway trucking industry. We exercised our option and acquired the licensing rights on July 22, 2002.
Alpha has completed the design and prototype of a 540 hp engine for use in highway trucks. The Company entered into a contractual agreement (the “Agreement”) dated July 1, 2008 with AbM Engineering, LLC for the purpose of the continued development and testing of the current 540 horsepower DCGT engine and a 70 horsepower/50kw generator combination. AbM is currently working in a collaborative effort with AMEC’s engineers to modify and test other DCGT engine applications.
Under our Agreement with Alpha, they will continue to consult and advise with AbM Engineering on future development of this 540 horsepower DCGT highway truck engine prototype at AbM’s facilities in Daytona Beach, Florida. We receive ongoing status reports of their progress but do not participate in the design, construction and/or testing of the engine. This new energy efficient detonation cycle gas turbine can be designed and manufactured as a new or replacement engine for all heavy duty trucks that utilize engines ranging from 300 to 1,000 horsepower. It is our intention to target 18 wheel class 8 vehicles commonly used for transporting goods throughout the United States for distribution of our engine.
Detonation refers to an instant burning of a fuel-air mixture producing an explosion. Cycle refers to the explosion happening in one chamber and then in another chamber, repeating over and over again. Gas is the fuel which is in a gaseous state. Turbine is a rotating wheel or disk connected to a shaft spinning in one direction. This combined process along with the EIC process creates the high efficiency, low emission engine that we intend to bring to market.
To date, we have no marketable product and but have completed initial testing of the 540 horsepower prototype. The Company has started demonstrating the engine to investors, and has begun demonstrating it to potential joint venture partners. The contract with Alpha has been completed and comprehensive testing and development of the 540 horsepower prototype is now moving forward at AbM Engineering’s facilities.
On October 24, 2006, the Company entered into three separate consulting agreements which were intended to provide the Company with strategic financial and corporate development services. As consideration for entering into the consulting agreements, the Company granted each consultant options to acquire up to 500,000 shares of the Company’s common stock at a price of $.50 per share based upon each respective consultant meeting specific milestones set forth in the consulting agreements. These options expired on October 26, 2008. During 2007, 300,000 and 100,000 of these options were earned and forfeited, respectively, and the Company recognized $155,188 in consulting expense. During 2008, 1,000,000 common stock options expired, and as of December 31, 2008, there are no common stock options outstanding under these consulting agreements. No compensation expense was recognized during 2008 relative to the above agreements.
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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.
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. The Debenture Holder shall be 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.
Golden Gate’s 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 triggering of certain events. It matures on June 30, 2012.
The Company entered into a Strategic Alliance Agreement (the “Agreement”) dated January 21, 2009 with Aerospace Machinery & Electric Co. Ltd., a Chinese corporation (“AMEC”) 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 (“DCGT”) specifically for application opportunities in the Peoples Republic of China. The terms of the Agreement call for AMEC and TTE to collaborate on modifying and applying the DCGT engine technology to, among other things, create two new engine sizes: a 150hp engine for automobiles and a 400hp engine for buses. The Agreement also provides that the parties anticipate that, pursuant to AMEC’s participation and performance under this Agreement, that they will enter into a Joint Venture agreement in the future whereby TTE will grant AMEC the exclusive rights to manufacture, market and sell the DCGT engines in China.
The Agreement provides that each Company will work independently and collectively, at their own expense, in a friendly competitive manner towards the modification of the DCGT to see who can make the best design or give the best innovative ideas to the DCGT engines, with Michael Rouse, the Company’s CEO being the final decision maker on the ultimate design questions. Robert L Scragg, the inventor and patent holder has filed for patent protection in China under the PCT (Patent Cooperation Treaty). In conjunction with the Agreement, the parties also executed a Confidentiality Agreement of even date with the Agreement.
Our Product
Our product is slated to be a new energy-efficient, Detonation Cycle Gas Turbine Engine (“DCGT”) for heavy-duty highway trucks. To date, we have no marketable product and will rely on AbM & AMEC to continue the development and testing of a 540 horsepower prototype that will conform to our licensed application. Since our inception, we have continued to raise capital to bring this patented technology closer to where it can be utilized in a common market. The application demanding the most change is the highway trucking market.
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Alpha has completed the design and prototype of a 540 hp engine for use in highway trucks. Therefore compliance with state and federal regulators will not be a factor until we have an engineered prototype in a test vehicle. The prototype phase of development is anticipated to continue for approximately two years from the completion of the funding. Alpha completed all research and development in 1997, which resulted in a patent being issued in 1999. Alpha has completed the design for the truck engine. We need to complete the prototype and test an engine that meets our needs using the existing proven technology; however, this takes a considerable amount of money.
The patent is a novel patent with a 20-year life from the filing date of December 16, 1997. The patent was based on research and development beginning in 1984, which included the design, construction, and testing of four working prototypes. The patent attorneys were Schoemaker & Mattare Ltd. The inventor will file additional patents to protect any new developments in the engine technology. We will have access to any new patent filings on the highway truck engines as provided for in our licensing agreement.
This patent is impossible to describe in layman terms as to how it works; however, its simplicity makes it very unique. A detonation cycle gas turbine engine includes a turbine rotor contained in a housing. The exhaust ports of respective valveless combustion chambers are located on opposite sides of the rotor directing combustion gases toward the turbine. The chambers are connected by a valveless manifold fed with fuel and oxidizer. When combustible gases are detonated by an igniter in one of the combustion chambers, the back pressure from the detonation shuts off the fuel and oxidizer flow to that chamber and redirects the fuel and oxidizer to the opposite chamber, where detonation occurs. The process repeats cyclically. Power is taken off the rotor shaft mechanically or electrically.
The invention utilizes a water wheel as the turbine wheel which has blades that are positively displaced through a blade race by the rapid expansion of gases exiting from combustion chambers via nozzles, rather than pistons or gas turbines.
Our engine has a blower, rather than a compressor, to supply less air per horsepower hour than required by existing gas turbines or piston engines, thereby producing less exhaust gases per horsepower hour.
The blower supplies low pressure air via a single manifold to two combustion chambers simultaneously thereby requiring less work to complete a detonation cycle, resulting in higher thermo mechanical efficiencies than gas turbines or piston engines.
The engine manifolds, combustion chambers, and ignition system has the capability of cyclically detonating fuel-air mixtures without using valves. The engine uses a fuel pump and vaporizers to gasify wet fuels prior to mixing with combustion air in the manifolds to produce complete combustion of all fuel-air mixtures in the detonation process. The engine uses a plasma arc ignition, a visibly constant illuminating plasma flame between two electrodes to detonate fuel-air mixtures and does not require critical ignition timing.
Low pressure air and fuel mixtures are detonated instantaneously–in less than one millisecond–producing high velocity shock waves that kinetically compress inert gases resulting in higher working pressures than the pressures produced in constant pressure heating utilized in gas turbine engines, and Otto and Diesel cycle piston engines.
The detonation cycle engine uses less working fluid and produces less exhaust gas per horsepower hour than Brayton cycle turbines and Otto or Diesel cycle piston engines.
Alpha has developed four working prototypes as described below:
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The DCGT includes an Electromagnetic Isothermal Combustion (“EIC”) process that powers the engine. The EIC process produces complete combustion of fuel-oxidizer mixtures in cyclic detonations that negate unwanted nitrogen oxide and carbon monoxide emissions. The high pressure gases produced by the detonations drive a unique turbine producing shaft horsepower.
The EIC process enables the DCGT to operate with blower air at low static pressure, negating the necessity of compressing and preheating fuel-oxidizer mixtures prior to combustion. By eliminating the compression of fuel-oxidizer mixtures, the DCGT achieves higher thermal efficiencies in a simplified mechanical structure. The DCGT has the following proprietary and competitive advantages over current diesel, gasoline and gas turbine engines:
Air cooled - less than 2 pounds per horsepower
Fewer moving parts - less maintenance
Flex-fuel and mixed fuels capability
Operates on all hydrocarbon fuels, hydrogen and syn fuels
Cold start capability with any fuels
Burns 30% less fuel “Greenhouse exhaust gases”
Less nitrogen oxides and carbon monoxide exhaust emissions
Less hydrocarbon exhaust emissions
No lube oil, filters or pumps
Alpha has completed basic research, exploratory development, and advanced development with the design, construction and testing of four experimental prototype engines.
Our new energy efficient detonation cycle gas turbine can be designed and manufactured as a new or replacement engine for all heavy duty trucks that utilize engines ranging from 300 to 1,000 horsepower.
We intend to target 18 wheel class 8 vehicles commonly used for transporting goods throughout the United States for distribution of our engine. We will not require governmental approval until such time as the engine is placed in vehicles for use. Our engine will meet the new more stringent tailpipe emission requirements set forth by the Environmental Protection Agency (“EPA”).
Research and development of our engine was completed in 1997 with patents obtained in 1999. Through testing, we hope to be able to comply with existing and future environmental laws. We intend to supply our fuel efficient, lower emission engine to a marketplace that must comply with more stringent governmental regulations. In each of the last two (2) fiscal years, the Company has spent $136,088 (2008) and $291,395 (2007) on research and development
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We acquired our license from Alpha on July 22, 2002. The material terms of the license agreement, as amended, are as follows:
During the year ended December 31, 2006, the Company issued 125,000 shares of common stock in satisfaction of the $250,000 note payable to Alpha and the accrual of minimum royalty fees began. As of December 31, 2008, the Company has accrued $562,500 of royalty fees related to this agreement. In addition, during the year ended December 31, 2006, the Company paid $416,667 of royalty fees through the issuance of 100,000 shares of common stock.
Other than being the licensor and a principal shareholder, we have no affiliation with Alpha.
COMPETITION
The Company has identified seven (7) major engine manufacturers, including Ford, Caterpillar, Cummins, Detroit Diesel, Mack Trucks, Navistar International and Volvo Truck that each manufacture heavy duty truck engines, both gasoline and diesel, which are likely to be the major competitors to our company once our product is ready for market. To the Company’s knowledge, at this time, none of the Company’s major competitors are working on the development of a turbine engine that would be in direct competition to the Company’s engine, and although we would be competing with them for customers, the Company believes that the technological differences between its product and those that are currently on the market, will provide the Company with a market niche that it can expand upon, even in the face of such established competitors.
EMPLOYEES
We presently have two full-time, and one part time employee. Staffing levels will be determined as we progress and grow. We also plan to add several employees to our staff. The level of employees is primarily contingent on the level of success of an offering. Our board of directors will determine the compensation of all new employees based upon job description.
Not applicable.
None.
The Company leases 3600 sq. ft. of space with Air Papa Bravo for an office/demonstration facility to house the development of the prototype. The lease agreement is for a two year period, expiring March 31, 2009 with an option to extend the lease for a second two year term. The base rent is $2,000 per month and the lease agreement contains an option to purchase the facility for $310,000 at the expiration of the lease. The Company has negotiated month to month terms at the end of this lease until a new lease can be negotiated.
As of the date of this 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.
During the year ended December 31, 2008, the Company did not submit any matters to a vote of its security holders.
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PART II
Since the August 2004 closing of the Company’s initial public offering, the Company’s Common Stock has traded in the over-the-counter market on the National Association of Securities Dealers, Inc. OTC Bulletin Board System (“OTCBB”) under the symbol “TTEG.” The following table sets forth the range of high and low closing bid quotations of the Common Stock as reported by the OTCBB for each fiscal quarter for the past two fiscal years. High and low bid quotations reflect inter-dealer prices without adjustment for retail mark-ups, markdowns or commissions and may not necessarily represent actual transactions.
FISCAL 2008
First Quarter (January 1, 2008 through March 31, 2008)
Second Quarter (April 1, 2008 through June 30, 2008)
Third Quarter (July 1, 2008 through September 30, 2008)
Fourth Quarter (October 1, 2008 through December 31, 2008)
FISCAL 2007
First Quarter (January 1, 2007 through March 31, 2007)
Second Quarter (April 1, 2007 through June 30, 2007)
Third Quarter (July 1, 2007 through September 30, 2007)
Fourth Quarter (October 1, 2007 through December 31, 2007)
On March 27, 2009 the closing bid price of the Company’s Common Stock as reported by the OTCBB was $0.10 and there were approximately 290 shareholders of record.
DIVIDENDS
We have not paid any cash dividends on our common or preferred stock and do not anticipate paying any such cash dividends in the foreseeable future. Earnings, if any, will be retained to finance future growth. We may issue shares of our common stock and preferred stock in private or public offerings to obtain financing, capital or to acquire other businesses that can improve our performance and growth. Issuance and or sales of substantial amounts of common stock could adversely affect prevailing market prices in our common stock.
Common Stock
As of December 31, 2008 there were approximately 245 beneficial owners of our common stock with 21,859,764 shares issued and outstanding.
During the year ended December 31, 2008, 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 October 2008, the Company issued 3,750 shares of common stock to a qualified investor for $0.08 per share for a total of $300.
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During October 2008, the Company issued 40,000 shares of common stock to a qualified investor for $0.09 per share for a total of $3,600.
During October 2008, the Company issued 27,000 shares of common stock to qualified investors for $0.10 per share for a total of $2,700.
During November 2008, the Company issued 12,500 shares of common stock to a qualified investor for $0.08 per shares for a total of $1,000.
During November 2008, the Company issued 32,400 shares of common stock to a qualified investor for $0.10 per share for a total of $3,240.
During December 2008, the Company issued 12,500 shares of common stock to qualified investors for services valued at $0.07 per share for a total of $888.
During December 2008, the Company issued 161,250 shares of common stock to a qualified investor for $0.08 for a total of $12,900.
During December 2008, the Company issued 27,300 shares of common stock to qualified investors for $0.10 per share for a total of $2,630.
During December 2008, the Company issued 10,000 shares of common stock to a qualified investor for services valued at $0.09 per share for a total of $900.
During December 2008, the Company issued 500,000 shares of common stock to a qualified investor for prepaid services valued at $0.13 per share for a total of $65,000.
During December 2008, the Company issued 12,500 shares of common stock to a qualified investor for prepaid services valued at $0.17 per share for a total of $2,125.
During December 2008, the Company issued 100,000 shares of common stock to qualified investors for services valued at $0.195 per share for a total of $19,535.
During December 2008, the Company issued 26,297 shares of common stock to a qualified investor for $0.08 per share for a total of $2,000.*
During December 2008, the Company issued 270,468 shares of common stock to qualified investors for $0.074 per share for a total of $20,000.*
During December 2008, the Company issued 202,703 shares of common stock to a qualified investor for $0.074 per share for a total of $15,000.*
During December 2008, the Company issued 200,000 options to purchase common stock at an exercise price of $0.10. The options expire in 10 years and have immediate vesting. During 2008, the Company recognized approximately $30,000 in expense related to the issuance.
The sale and issuance of securities above was deemed to be exempt from registration under the Securities Act of 1933, as amended, by virtue of Rule 506 of Regulation D promulgated there under.
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.
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Plan category
Equity compensation plans not approved by security holders 2006 Incentive Compensation Plan
The Company’s 2008 Incentive Compensation Plan (the “2008 Plan”) authorizes up to 5,000,000 shares of common stock to any person employed by the Company either as an employee, officer, director or independent consultant or other person employed by the Company, provided that no person can be granted shares under the 2008 Plan for services related to capital raising or promotional activities. As of December 31, 2008, no shares have been issued pursuant to the 2008 Plan. There are no restrictions on resale upon the purchases of the stock from the employees or the consultants, unless contained in the written award approved by the Board of Directors.
Not required.
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.
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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.
Background of our 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 (see “Business of the Company”, “Our Product.”).
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.
The following steps have been or are being taken by the Company to demonstrate the viability of a final prototype engine:
Step 1 The completion of the design has been done and the prototype engine has been built
Step 2 The Company has leased its office and demonstration facilities
Step 3 The Engine is undergoing continuing testing and development, the cost of which is anticipated to be approximately $2,500,000
In Step 3, we will rely on AbM and AMEC to test the prototype engine at their facilities. AbM & AMEC will conduct test demonstrations to show the viability and function of the engine. The cost of the on-going testing is expected to be funded from the proceeds of a private placement offering.
For the year ended December 31, 2008 compared to the year ended December 31, 2007:
Research and Development Costs – During the years ended December 31, 2008 and 2007, research and development costs totaled $136,088 and $291,395, respectively. The decrease of $155,307 was mainly due to the completion of the accrual of amounts owed to Alpha for the design and testing of the prototype during 2007.
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Operating Costs – During the years ended December 31, 2008 and 2007, operating costs totaled $827,365 and $2,194,211, respectively. The decrease of $1,366,846 was mainly attributable to a decrease in consulting expense of $931,140 due to the Company not having the operating capital to enter into as many consulting agreements during 2008. The decrease is also due to a $197,822 decrease in payroll expenses because of the resignation of James Teeters and a reduction in annual salaries of the remaining officers. Finally, the Company decreased its stock for services expense by approximately $192,400.
Interest (Income) Expense - Net - During the years ended December 31, 2008 and 2007 net interest expense totaled $19,244 and $(15,254), respectively. The increase of $34,478 was due to the Company issuing a convertible debenture to Golden Gate Investors, Inc. and the amortization of the beneficial conversion feature associated with the debentures during 2008.
The net loss for the years ended December 31, 2008 and 2007 was $(982,677) and $(2,470,352), respectively. The decrease of $1,487,675 was mainly attributable to the decrease in operating costs and research and development expenses.
Liquidity and capital resources
As shown in the accompanying financial statements, for the year ended December 31, 2008 and 2007 and since November 27, 2000 (date of inception) through December 31, 2008, the Company has had net losses of $982,677, $2,470,352 and $9,292,006, respectively. As of December 31, 2008, 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. 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 December 31, 2008 we raised cash of $1,286,009 net of issuance costs, through private placements of common stock financings and $157,250 through the issuance of convertible notes payable. During August, 2004 our Form SB-2 Registration Statement became effective and we raised $123,753 through common stock sales, and offset $41,378 of offering costs against those proceeds. The proceeds from the sale of this common stock have been used for general and administrative expenses.
Since our inception through December 31, 2008 we have incurred $3,418,192 of research and development costs and operating expenses. 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 December 31, 2008, we had an accumulated deficit of $9,292,006 and a working capital deficit of $1,013,639.
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.
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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.
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. The Holder shall be 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.
Golden Gate’s 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.
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.
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The Company may receive proceeds in the future from the exercise of warrants and options outstanding as of December 31, 2008 in accordance with the following schedule:
2006 Non-Plan Options and Warrants
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.
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 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
In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, Disclosures About Derivative Instruments and Hedging Activities. (“SFAS 161”). SFAS 161 requires additional disclosures related to the use of derivative instruments, the accounting derivatives and the financial statement impact of derivatives. SFAS No. 161 is effective for fiscal years beginning after November 15, 2008. The adoption of SFAS 161 will not have a material impact on the Company’s consolidated financial statements.
In April 2008, the FASB issued FASB Staff Position (FSP) FAS 142-3, Determination of the Useful Life of Intangible Assets. FSP FAS 142-3 amends the factors that should be considered in developing renewal
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or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, Goodwill and Other Intangible Assets. FSP FAS 142-3 is effective for fiscal years beginning after December 15, 2008 and early adoption is prohibited. The adoption of this statement will not have a material effect on the Company’s financial statements.
In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles. SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United Statements. It is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. The adoption of this statement will not have a material effect on the Company’s financial statements.
Other recent accounting pronouncements issued by the FASB (including its EITF), the AICPA, and the SEC did not or are not believed by management to have a material impact on the Company’s present or future financial statements.
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(A Development Stage Enterprise)
For the Years Ended December 31, 2008 and 2007,
and the Period November 27, 2000 (Date of Inception)
through December 31, 2008
Report of Independent Registered Public Accounting Firm
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Financial Statements
Contents
Balance Sheets
Statements of Operations
Statements of Changes in Stockholders’ Deficit
Statements of Cash Flows
Notes to Financial Statements
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Audit Committee
DeLand, Florida
We have audited the accompanying balance sheets of Turbine Truck Engines, Inc. (a development stage enterprise) as of December 31, 2008 and 2007 and the related statements of operations, changes in stockholders' deficit, and cash flows for the years ended December 31, 2008 and 2007 and the period from November 27, 2000 (Date of Inception) through December 31, 2008. These financial statements are the responsibility of the management of Turbine Truck Engines, Inc. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we expressed no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Turbine Truck Engines, Inc. as of December 31, 2008 and 2007 and the results of its operations and its cash flows for the years ended December 31, 2008 and 2007 and the period from November 27, 2000 (Date of Inception) through December 31, 2008 in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2, the Company incurred a net loss of $982,677 during the year ended December 31, 2008 and has an accumulated deficit of $9,292,006 from inception to December 31, 2008. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Pender Newkirk & Company LLP
Certified Public Accountants
Tampa, Florida
March 31, 2009
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Assets
Current assets:
Cash
Prepaid expenses
Loan costs net of accumulated amortization
Total current assets
Furniture and equipment, net of accumulated depreciation of $35,721 (2008) and $17,665 (2007)
Liabilities and Stockholders’ Deficit
Current liabilities:
Accounts payable
Accrued expenses
Accrued interest
Accrued payroll
Accrued royalty fees
Due to related party
Note payable
Total current liabilities
Accrued payroll – long term
Convertible note payable net of unamortized discount of $13,544
Note payable to related party
Total liabilities
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; 21,859,764 (2008) and 17,349,346 (2007) shares issued and outstanding
Additional paid in capital
Deficit accumulated during development stage
Prepaid consulting services paid with common stock
Receivable for common stock
Total stockholders’ deficit
The accompanying notes are an integral part of the financial statements.
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Research and development costs
Operating costs
Interest (income) expense
Net loss
Net loss per share
Weighted average number of common shares outstanding
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(A Development Stage Company)
Statement of Changes in Stockholders’ Deficit
For Each of the Years From November 27, 2000 (Date of Inception) through December 31, 2008
Issuance of common stock for option to acquire license and stock subscription receivable, December 2000
Net loss for the period
Balance, December 31, 2000
Issuance of common stock for cash, February 2001*
Issuance of common stock for cash, March 2001*
Issuance of common stock for cash, August 2001*
Issuance of common stock for cash, September 2001*
Payment for common stock issued under subscription receivable
Balance, December 31, 2001
Issuance of common stock for cash, January 2002*
Issuance of common stock for cash, February 2002*
Issuance of common stock for cash, April 2002*
Issuance of common stock for cash, May 2002*
Issuance of common stock for cash, June 2002*
Issuance of common stock for cash, August 2002*
Issuance of common stock for cash, October 2002*
Issuance of common stock to acquire licensing agreement, July 2002*
Shares returned to treasury by founding stockholder, July 2002
Balance, December 31, 2002
Issuance of common stock for cash, February 2003*
Issuance of common stock for cash, September 2003*
Issuance of common stock for services, September 2003*
Payment for common stock issued under subscription agreement
Offering costs for private placement offering
Balance, December 31, 2003
Issuance of notes payable with beneficial conversion feature
Issuance of common stock for services, September 2004 ($2.00 per share)
Conversion of notes payable, August 2004 ($2.00 per share)
Issuance of common stock for cash, September 2004 ($2.00 per share)
Issuance of common stock for cash, October 2004 ($2.00 per share)
Issuance of common stock for cash, November 2004 ($2.00 per share)
Issuance of common stock for cash, December 2004 ($2.00 per share)
Amortization of offering costs related to Form SB-2 filing
Amortization of stock for services related to Form SB-2 offering
Contribution from shareholder
Balance, December 31, 2004
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Issuance of common stock for services, January 2005 ($2.00 per share)
Issuance of common stock in satisfaction of a note payable, February 2005 ($2.00 per share)
Issuance of common stock for cash, February 2005 ($2.00 per share)
Issuance of common stock for cash, March 2005 ($2.00 per share)
Issuance of common stock for services, April 2005 ($2.00 per share)
Capital contribution from stockholder, May 2005
Issuance of common stock for cash, May 2005 ($2.00 per share)
Write off of stock for services related to Form SB-2 filing
Issuance of common stock for cash, June 2005 ($2.00 per share)
Issuance of common stock for services, June 2005 ($1.70 per share)
Capital contribution from stockholder, June 2005
Issuance of common stock for cash, August 2005 ($1.00 per share)
Issuance of common stock for services, July 2005 ($1.00 per share)
Amortization of prepaid services paid for with common stock
Write off prepaid services paid for with common stock due to terminated agreement
Issuance of common stock for cash, October ($1.00 per share)
Issuance of common stock for cash, November ($1.00 per share)
Issuance of common stock for cash, December ($1.00 per share)
Balance, December 31, 2005
Issuance of common stock for cash, January ($1.00 per share)
Issuance of common stock for cash, February ($1.00 per share)
Issuance of common stock for cash, March ($1.00 per share)
Issuance of common stock for cash, April ($1.00 per share)
Issuance of common stock for services, May ($1.00 per share)
Issuance of common stock for services, May ($1.15 per share)
Issuance of common stock for cash, June ($.80 per share)
Issuance of common stock and warrants for cash, June ($.50 per share)
Issuance of common stock for services, June ($1.15 per share)
Issuance of common stock for services, July ($1.10 per share)
Issuance of common stock for services, July ($.50 per share)
Issuance of common stock for settlement of debt, August ($.85 per share)
Issuance of common stock for services, August ($.81 per share)
Issuance of common stock and warrants for cash, September ($.50 per share)
Issuance of common stock for services, September ($.50 per share)
Issuance of common stock for services, September ($.74 per share)
Issuance of common stock in settlement of a payable, September ($4.16 per share)
Issuance of options to employees, directors and consultants, September
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24
Issuance of common stock for services, October ($0.50, per shares)
Issuance of options to employees, directors and consultants, October
Issuance of common stock for cash, October ($0.50 per share)
Issuance of common stock for services, October ($0.67, per shares)
Issuance of common stock for services, November ($0.50, per shares)
Issuance of common stock for cash, November ($0.50 per share)
Issuance of common stock for cash, November ($0.60 per share)
Balance December 31, 2006
Issuance of options to consultants, January
Issuance of common stock for cash, January ($0.50 per share)
Issuance of common stock for exercise of options, January ($0.50 per share)
Issuance of common stock for services, January ($0.66, per shares)
Issuance of common stock for services, January ($0.51, per shares)
Issuance of common stock for exercise of options, February ($0.50 per share)
Issuance of common stock for exercise of options, February ($0.60 per share)
Issuance of common stock for cash, February ($0.23 per share)
Issuance of common stock for services, February ($0.87, per shares)
Issuance of common stock for services, February ($0.72, per shares)
Issuance of common stock for services, March ($0.65, per shares)
Issuance of common stock for services, March ($0.70, per shares)
Issuance of common stock for exchange of fixed assets, April ($0.50, per share)
Issuance of common stock for cash, May ($0.25, per share)
Issuance of common stock for cash, June ($0.25, per share)
Issuance of common stock for services, June ($0.43, per share)
Issuance of common stock for exchange of fixed assets, June ($0.50 per share)
Issuance of common stock for services, June ($0.44, per share)
Issuance of common stock and warrants for cash, July ($0.25, per share)
Issuance of common stock for services, August ($0.55, per share)
Issuance of common stock for services, August ($0.50, per share)
Issuance of common stock for services, August ($0.38, per share)
Issuance of common stock and warrants for cash, August ($0.25, per share)
Issuance of common stock for services, September ($0.50, per share)
Issuance of common stock for cash, September ($0.25, per share)
Issuance of common stock for cash, September ($0.30, per share)
Issuance of common stock for cash, September ($0.37, per share)
Issuance of options & warrants to employees & consultants, September
Issuance of common stock for services, October ($0.25, per share)
Issuance of common stock for services, October ($0.56, per share)
Issuance of common stock for cash, October ($0.50, per share)
Issuance of common stock for cash, October ($0.53, per share)
Issuance of common stock for cash, November ($0.28, per share)
Issuance of common stock for cash, November ($0.32, per share)
Issuance of common stock for cash, November ($0.37, per share)
Issuance of common stock for cash, November ($0.68, per share)
Issuance of common stock for cash, December ($0.25, per share)
Balance December 31, 2007
25
Issuance of common stock for services, February ($0.87, per share)
Issuance of common stock for services, February ($0.72, per share)
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Issuance of common stock for cash, November ($0.25, per share)
Payment on receivable for common stock
For Each of the Years from November 27, 2000 (Date of Inception) through December 31, 2008
Issuance of common stock and warrants for cash, January ($0.15, per shares)
Issuance of common stock for services, February ($0.38, per shares)
Issuance of common stock for services, February ($0.26, per shares)
Issuance of common stock for services, April ($0.12, per share)
Issuance of common stock for services, May ($0.20, per share)
Issuance of common stock for cash, May ($0.10, per share)
Issuance of common stock for cash, June ($0.10, per share)
Issuance of common stock for cash, June ($0.085, per share)
Issuance of common stock for cash, June ($0.08, per share)
Issuance of common stock for services, June ($0.16, per share)
Value of the beneficial conversion feature for the issuance of convertible debt
Issuance of common stock for cash, July ($0.10, per share)
Issuance of common stock for services, July ($0.15, per share)
Issuance of common stock for cash, August ($0.10, per share)
Issuance of common stock for cash, September ($0.10, per share)
Issuance of common stock for cash, September ($0.08, per share)
Issuance of common stock for cash, October ($0.08, per share)
Issuance of common stock for cash, October ($0.09, per share)
Issuance of common stock for cash, October ($0.10, per share)
Issuance of common stock for cash, November ($0.08, per share)
Issuance of common stock for cash, November ($0.10, per share)
Issuance of common stock for services, December ($0.071, per share)
Issuance of common stock for cash, December ($0.08, per share)
Issuance of common stock for cash, December ($0.10, per share)
Issuance of common stock for services, December ($0.09, per share)
Issuance of common stock for services, December ($0.13, per share)
Issuance of common stock for services, December ($0.17, per share)
Issuance of common stock for services, December ($0.1954, per share)
Issuance of common stock for conversion of notes, December ($0.08, per share)
Issuance of common stock for conversion of notes, December ($0.07, per share)
Issuance of warrants for services, December
Balance December 31, 2008
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Operating activities
Adjustments to reconcile net loss to net cash used by operating activities:
Common stock and long-term debt issued for acquisition of license agreement
Common stock issued for services and amortization of common stock issued for services
Options and warrants issued to employees, directors and consultants
Amortization of beneficial conversion feature
Amortization of deferred loan costs
Write off deferred offering costs
Write off of deferred non cash offering costs
Depreciation
Amortization of discount on notes payable
Decrease (increase) in prepaid expenses
Increase (decrease) in:
Net cash used by operating activities
Investing activities
Issuance of notes receivable from stockholders
Repayment of notes receivable from stockholders
Advances to related party
Purchase of fixed assets
Net cash used by investing activities
Financing activities
Repayment of stockholder advances
Advances from stockholders
Increase in deferred offering costs
Proceeds from issuance of common stock
Proceeds from exercise of options
Proceeds from issuance of subscription
Proceeds from issuance of notes payable
Net cash provided by financing activities
Net increase in cash
Cash at beginning of year/period
Cash at end of year/period
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Supplemental disclosures of cash flow information and non cash investing and financing activities:
Cash paid for interest
Subscription receivable for issuance of common stock
Option to acquire license for issuance of common stock
Deferred offering costs netted against issuance of common stock under private placement
Deferred offering costs netted against issuance of common stock
Value of beneficial conversion feature of notes payable
Deferred non-cash offering costs in connection with private placement
Application of amount due from shareholder against related party debt
Amortization of offering costs related to stock for services
Settlement of notes payable in exchange for common stock
Common stock issued in exchange for prepaid services
Common stock issued in exchange for accrued royalties
Receivable issued for exercise of common stock options
Common stock issued in exchange for fixed assets
Beneficial conversion feature on convertible notes payable
Conversion of convertible debt to equity (499,468 shares of common stock)
30
Turbine Truck Engines, Inc. (the “Company”) is a development stage enterprise that was incorporated in the state of Delaware on November 27, 2000. 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 DeLand, 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.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. For the year ended December 31, 2008 and since November 27, 2000 (date of inception) through December 31, 2008, the Company has had a net loss of $982,677 and $9,292,006, respectively. As of December 31, 2008, 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
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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.
The significant accounting policies followed are:
The Company’s financial instruments include cash, accounts payable, accrued liabilities, notes payable, and embedded derivatives related to the convertible note payable. The carrying amounts of cash, accounts payable and accrued liabilities approximate their fair value, due to the short-term nature of these items. The carrying amount of notes payable approximates their fair value due to the use of market rates of interest and maturity schedules for similar issues. The fair value of the embedded derivatives are based on Level 3 inputs as discussed in Note 13.
The Company evaluates the recoverability of its long-lived assets or asset groups whenever adverse events or changes in business climate indicate that the expected undiscounted future cash flows from the related assets may be less than previously
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anticipated. If the net book value of the related assets exceed the undiscounted future cash flows of the assets, the carrying amount would be reduced to the present value of their expected future cash flows and an impairment loss would be recognized. There have been no impairment losses in any of the periods presented.
Research and development costs are charged to operations when incurred and are included in operating expenses. The amounts charged for the year ended December 31, 2008 and 2007 and the period November 27, 2000 (date of inception) to December 31, 2008 amounted to $136,088, $291,395 and $3,418,192, respectively.
Deferred income tax assets and liabilities arise from temporary differences associated with differences between the financial statements and tax basis of assets and liabilities, as measured by the enacted tax rates, which are expected to be in effect when these differences reverse. Deferred tax assets and liabilities are classified as current or non-current, depending on the classification of the assets or liabilities to which they relate. Deferred tax assets and liabilities not related to an asset or liability are classified as current or non-current depending on the periods in which the temporary differences are expected to reverse. The principal types of temporary differences between assets and liabilities for financial statements and tax return purposes are set forth in Note 9.
The Company adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48) on January 1, 2007. FIN 48 prescribes a comprehensive model for recognizing, measuring, presenting and disclosing in the financial statements tax positions taken or expected to be taken on a tax return, including a decision whether to file or not to file in a particular jurisdiction. The adoption of FIN 48 did not have a material impact to the Company’s financial statements.
Earnings per common share are computed in accordance with SFAS No. 128, “Earnings Per Share,” which requires companies to present basic earnings per share and diluted earnings per share. Basic earnings per share are computed by dividing net income by the weighted average number of shares of common stock outstanding during the year. Diluted earnings per common share are computed by dividing net income by the weighted average number of shares of common stock outstanding and dilutive options outstanding during the year. Common stock equivalents for the years ended December 31, 2008 and 2007 and the period from November 27, 2000 (Date of Inception) through December 31, 2008 were anti-dilutive due to the net
33
losses sustained by the Company during these periods. The diluted weighted average number of shares, including these common share equivalents would have been 20,282,485, 17,667,745 and 13,966,773 for the years ended December 31, 2008 and 2007 and the period from November 27, 2000 (Date of Inception) through December 31, 2008, respectively.
The Company issues common stock and common stock options and warrants to consultants for various services. For these transactions the Company follows the guidance in EITF 96-18 “Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring or in Conjunction with Selling Goods or Services”. Costs for these transactions are measured at the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. The value of the common stock is measured at the earlier of (i) the date at which a firm commitment for performance by the counterparty to earn the equity instruments is reached or (i) the date at which the counterparty’s performance is complete. For the periods ended December 31, 2008, and 2007 the Company recognized $29,578 and $155,188, respectively, in consulting expenses and a corresponding increase to additional paid-in-capital related to common stock options issued for these services. Additionally, the Company recognized $110,768 and $890,112 in consulting expense related to prepaid consulting services paid for with common stock for the periods ended December 31, 2008 and 2007, respectively.
In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 123 (Revised 2004), “Share-Based Payment” (SFAS 123R). SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized as compensation expense in the consolidated financial statements based on their fair values. That expense will be recognized over the period during which an employee is required to provide services in exchange for the award, known as the requisite service period (usually the vesting period). We adopted SFAS 123R effective beginning January 1, 2006. Prior to the adoption of SFAS 123(R) we did not issue any stock options. The Company amortizes compensation expenses on a straight-line basis over the requisite service period. As of December 31, 2008, there was no unrecognized stock-based compensation expense related to nonvested stock options.
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The following table represents our nonvested stock option and warrant activity for the year ended December 31, 2008:
Nonvested options - December 31, 2007
Granted
Vested
Forfeited
Nonvested options - December 31, 2008
In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities ("SFAS 159"). SFAS 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. SFAS 159 permits the measurement of specified financial instruments and warranty and insurance contracts at fair value on a contract-by-contract basis, with changes in fair value recognized in earnings each reporting period. There was no impact upon adoption of SFAS 159, as we did not elect the fair value provisions.
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised 2007), Business Combinations ("SFAS 141R"). SFAS 141R establishes the principles and requirements for how an acquirer: 1) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree; 2) in a business combination achieved in stages, sometimes referred to as a step acquisition, recognizes the identifiable assets and liabilities, as well as the non-controlling interest in the acquiree, at the full amounts of their fair values; 3) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase. SFAS 141R establishes disclosure requirements to enable users of the financial statements to evaluate the nature and financial effects of the business combination. This Statement is to be applied prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period on or after December 15, 2008 adoption of SFAS 141R will have an impact on our accounting for future business combinations; however, the materiality of that impact cannot be determined.
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In December 2007, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 110 (“SAB 110”) which allows companies that do not have sufficient historical experience for estimating the expected term of “plain vanilla” share option grants to provide a reasonable estimate and to continue use of the “simplified” method after December 31, 2008. SAB 110 extends the opportunity to use the “simplified” method beyond December 31, 2008, as was allowed by Staff Accounting Bulletin No. 107 (“SAB 107”). Adoption of SAB 110 will not impact our financial statements as we did not use the “simplified” method to estimate lives of share-based awards.
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133,” or “SFAS No. 161.” SFAS No. 161 changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for under FASB Statement 133 and its related interpretations, and how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. The Company does not expect SFAS No. 161 to have a material impact on its results of operations or financial condition.
In April 2008, the FASB issued FASB Staff Position (FSP) FAS 142-3, Determination of the Useful Life of Intangible Assets. FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, Goodwill and Other Intangible Assets. FSP FAS 142-3 is effective for fiscal years beginning after December 15, 2008 and early adoption is prohibited. The adoption of this statement will not have a material effect on the Company’s financial statements.
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In July 2002, the Company exercised its option to obtain a license to commercially exploit certain turbine truck engine technology owned by Alpha. The original agreement required the Company to complete and file a registration statement with the Securities and Exchange Commission (SEC) and once the public offering was filed and declared effective by the SEC, Alpha was to grant the license in exchange for 10,000,000 shares of common stock of the Company and other licensing considerations as follows:
Licensing fee – $250,000 licensing note payable on August 23, 2005 or agreement is terminated;
Minimum royalties – $250,000 due minimum royalty payment each year once licensing note is settled;
Royalties – eight percent of net sales after manufacturing and sales commence; and
Contract fees for design and engineering services.
In July 2002, Alpha modified the agreement to allow the Company to acquire the license agreement in advance of completing its registration statement and accepted a note as payment for the licensing fee and for the issuance of 5,000,000 shares of common stock in lieu of the original 10,000,000 shares. The value of these shares was based on $.50 per share, which was the issuance price for common stock under the Company’s private placement offering. In August 2003 and 2004, the agreement was further amended to extend the term of the note and to establish that minimum royalty payments shall begin after the note is settled.
During the year ended December 31, 2005, the Company issued 125,000 shares of common stock in satisfaction of the $250,000 note and the accrual of the minimum royalty fees began. In addition, during the year ended December 31, 2006, the Company paid $416,667 of royalty fees through the issuance of 100,000 shares of common stock. As of December 31, 2008, the Company has accrued $562,500 of royalty fees related to this agreement.
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Alpha owns the patents to a new gas turbine engine system called Detonation Cycle Gas Turbine Engine (DCGT). Alpha is in the business of licensing the use of its DCGT technology for many different applications, including the manufacture of heavy duty highway truck engines. Alpha and CNF Transportation (formerly Consolidated Freightways, Inc.) have an agreement to form and finance a potential 50/50 joint venture after the demonstration of a highway truck engine for the manufacture and marketing of heavy duty highway truck engines, both for the fleet of CNF Transportation and exclusive sales to the highway trucking industry. CNF Transportation is a large, over the road freight hauling company and manufacturer of heavy duty highway trucks. Upon the receipt of its licensing agreement with Alpha, the Company has assumed Alpha’s right to enter into this joint venture.
The Company has recognized $2,735,649 of research and development expense for the acquisition of the license agreement, as the license is exclusively for the development, manufacturing and sales of the DCGT and has no future economic benefit relative to other research and development projects.
During the year ended December 31, 2006, the Company entered into an agreement with a consultant to provide consulting services. In exchange for those services, the Company issued 150,000 shares of common stock. These shares were valued at $172,500 to be amortized through June 2007 at $14,375 per month. For the year ended December 31, 2007, $79,062 has been included in consulting expense.
During the year ended December 31, 2006, the Company entered into an agreement with a consultant to provide consulting services. In exchange for those services, the Company issued 150,000 shares of common stock. These shares were valued at $75,000 to be amortized through May 2007 at $12,500 per month. For the year ended December 31, 2007, $56,250 has been included in consulting expense.
During the year ended December 31, 2006, the Company entered into an agreement with a consultant to provide consulting services. In exchange for those services, the Company issued 109,091 shares of common stock. These shares were valued at $120,000 to be amortized through July 2007 at $10,000 per month. For the year ended December 31, 2007 $65,000 has been included in consulting expense.
During the year ended December 31, 2006, the Company entered into an agreement with a consultant to provide consulting services. In exchange for those services, the Company issued 10,000 shares of common stock. These shares were valued at $5,000 to be amortized through July 2007 at $417 per month. For the year ended December 31, 2007, $2,708 has been included in consulting expense.
38
For the Years Ended December 31, 2008 and 2006,
During the year ended December 31, 2006, the Company entered into an agreement with a consultant to provide consulting services. In exchange for those services, the Company issued 10,000 shares of common stock. These shares were valued at $5,000 to be amortized through September 2007 at $455 per month. For the year ended December 31, 2007, $4,091 has been included in consulting expense.
During the year ended December 31, 2007, the Company entered into an agreement with a consultant to provide consulting services. In exchange for those services, the Company issued 25,000 shares of common stock. These shares were valued at $17,500 and were all expensed during the year ended December 31, 2008 when the services were provided.
During the year ended December 31, 2007, the Company entered into an agreement with a consultant to provide consulting services. In exchange for those services, the Company issued 1,300,000 shares of common stock. These shares were valued at $650,000 to be expensed upon the achievement of certain goals set forth in the agreement. For the year ended December 31, 2007, $650,000 has been included in consulting expense.
During the year ended December 31, 2008, the Company entered into a consulting agreement for public relations services in exchange for 380,000 shares of common stock valued at $61,600 to be provided through October 2008. As of December 31, 2008, the Company has included $61,600 in consulting expense related to this agreement.
During the year ended December 31, 2008, the Company entered into a consulting agreement for consulting services in exchange for 100,000 shares of common stock valued at $20,000 to be provided through May 27, 2009. As of December 31, 2008, the Company has included $8,333 in prepaid consulting services paid with common stock. For the year ended December 31, 2008, the Company recognized $11,667 in consulting expense related to this agreement.
During the year ended December 31, 2008, the Company entered into a consulting agreement for various consulting services in exchange for 300,000 shares of common stock valued at $48,000. As of December 31, 2008, the Company has included $28,000 in prepaid consulting services paid with common stock. For the year ended December 31, 2008, the Company recognized $20,000 in consulting expense related to this agreement.
39
During the year ended December 31, 2008, the Company entered into a consulting agreement for various consulting services in exchange for 500,000 shares of common stock valued at $65,000 to be amortized through July 2009 at $9,286 per month. As of December 31, 2008, the Company has included $65,000 in prepaid consulting services paid with common stock.
Furniture and equipment at December 31 consist of the following:
Furniture and fixtures
Equipment
Leasehold improvements
Less accumulated depreciation and amortization
During the year ended December 31, 2008, the Company issued 200,000 warrants for services rendered from a consultant. The warrants entitle the holder to purchase 200,000 shares of the Company’s common stock, at any time, at an exercise price of $0.10 per share and expire in 2018. For the period ended December 31, 2008, the Company recognized $29,578 in expense related to this issuance.
During the years ended December 31, 2008 and 2007, the Company issued 100,000 and 538,413 warrants, respectively, in conjunction with the issuance of common stock. The warrants entitle the holder to purchase 100,000 and 538,413 shares of the Company’s common stock, respectively, at any time, at exercise prices ranging from $0.30 to $1.00 per share, respectively and expire in 2010 and 2009, respectively.
For the periods ended December 31, 2008 and 2007, the Company recognized $29,578 and $263,658 in compensation expense related to stock options and warrants issued to consultants and employees, which is included in the statements of operations.
40
The Company’s 2006 Incentive Compensation Plan authorized 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’s 2008 Incentive Compensation Plan authorizes up to 5,000,000 shares of common stock to restrictions on resale upon the purchasers of the Stock from the employees or the consultants, unless contained in the written award approved by the Board of Directors. As of December 31, 2008, no shares have been issued under this plan.
The fair value of each option under the 2006 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 period 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.
Expected volatility
Expected dividends
Expected term
Risk-free rate
Outstanding and Exercisable
Outstanding at December 31, 2007
Options and warrants granted
Options and warrants exercised
Options and warrants cancelled or expired
Outstanding at December 31, 2008
Exercisable at December 31, 2008
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The following table summarizes information about options and warrants outstanding and exercisable as of December 31, 2008:
Range of
Exercise Price
$.10 - $2.00
As of December 31, 2008 there were 1,398,413 options and warrants exercisable at a weighted average exercise price of $0.68. The intrinsic value of both the exercisable and outstanding options and warrants at December 31, 2008, based on the quoted market rate of $0.08 per common share is $0. Intrinsic value is the amount by which the fair value of the underlying stock exceeds the exercise price of the options.
As of December 31, 2007 there were 1,558,413 options and warrants exercisable at a weighted average exercise price of $0.75. The intrinsic value of both the exercisable and outstanding options and warrants at December 31, 2007, based on the quoted market rate of $0.40 per common share is $0.
Net cash proceeds from the exercise of options and warrants were $0 and $45,000, respectively, for the years ended December 31, 2008 and 2007. The intrinsic value of options and warrants exercised was $0 and $0, respectively, for the years ended December 31, 2008 and 2007.
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 $562,500 and $312,500 as of December 31, 2008 and 2007, respectively.
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 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. There have been no additional costs incurred during the years ended December 31, 2008 and 2007.
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The Company leases its corporate headquarters on a month-to-month basis. For the periods ended December 31, 2008 and 2007, rent expense was $33,600 and $41,800, respectively.
During the year ended December 31, 2007, the Company entered into a lease agreement with Air Papa Bravo, Corporation to lease an airplane hanger for the development of the prototype. The lease agreement is for a two year period expiring March 31, 2009 with an option to extend the lease for a second two year term. The base rent is $2,000 per month and the lease agreement contains an option to purchase the facility for $310,000 at the expiration of the lease. The Company has negotiated month to month terms at the end of this lease until a new lease can be negotiated.
Future minimum lease payments are $6,000 during the year ended December 31, 2009.
Deferred taxes are recorded for all existing temporary differences in the Company’s assets and liabilities for income tax and financial reporting purposes. Due to the valuation allowance for deferred tax assets, as noted below, there was no net deferred tax benefit or expense for the years ended December 31, 2008 or 2007.
There is no current or deferred income tax expense or benefit allocated to continuing operations for the years ended December 31, 2008 or 2007 or the period November 27, 2000 (Date of inception) through December 31, 2008.
The provision for income taxes is different from that which would be obtained by applying the statutory federal income tax rate to income before income taxes. The items causing this difference are as follows:
Tax expense (benefit) at U.S. statutory rate
State income tax expense (benefit), net of federal benefit
Stock option expense
Effect of non-deductible expenses
Change in valuation allowance
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The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2008 are as follows:
Deferred tax assets (liability), noncurrent:
License agreement
Capitalized start up costs
Net operating loss
Stock compensation
Contribution carryover
Beneficial Conversion feature
Valuation allowance
Since management of the Company believes that it is more likely than not that the net deferred tax assets will not provide future benefit, the Company has established a 100 percent valuation allowance on the net deferred tax assets as of December 31, 2008.
As of December 31, 2008, the Company had federal and state net operating loss carry-forwards totaling approximately $36,000 which begin expiring in 2022.
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 December 31, 2008 is $1,901. This note payable was unsecured, non-interest bearing and has no specific repayment terms, however, payment is not expected prior to December 31, 2009.
The due to related party account is made up of advances from the majority shareholder to assist the Company with its financial obligations. These advances are non-interest bearing, unsecured and due on demand.
As of December 31, 2008 and 2007, accounts payable included $25,150 and $18,250, respectively, for various accounting services, due to the Company’s Chief Accounting Officer who is also a director of the Company.
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.
44
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.
Related to the variability associated with the conversion price on the debenture, the Company considered the guidance in SFAS No. 133, and Emerging Issues Task Force 00-19, “Accounting for Derivative Financial Instructions Indexed To, and Potentially Settled In, a Company’s Own Stock.” The Company’s Chief Executive Officer and majority shareholder has the ability to increase the authorized shares of common stock of the Company to a level that would maintain the net share settlement of any potential conversion within the Company’s control. As a result, the embedded conversion option was determined to be a component of equity. Accordingly, the Company recorded a beneficial conversion feature (BCF) based on the intrinsic value of the Company’s common stock at the commitment date of the debenture. The debt discount associated with the BCF is being amortized over the life of the debt.
The agreement also calls for the Company to maintain timely filing of all reports required by the Securities and Exchange Commission (“SEC”). In the event the Company does not maintain
45
timely filings, the note calls for a default payment of 150% of the outstanding principle balance. Per the guidance in EITF 00-19, if the note holder’s require cash payments in the event the Company fails to make timely filings with the SEC, then the contract must be classified as an asset or a liability. The Company has not historically been late on its filings with the SEC, so the probability of the Company filing late is so remote as to make the fair value of the embedded derivative de minimus, therefore, the Company has not recorded an underlying asset or liability associated with this feature.
The debenture also has an interest rate adjustment indexed to changes in the Company’s common stock. In the event that the Company’s common stock trades at $0.049 or lower, at any time during the six month period from the date of the agreement, and ending on the six month anniversary date of the agreement, the interest rate increases to 9.75% for the remaining life of the debenture. The Company has determined that feature was a derivative liability. However, as of December 31, 2008, the derivative liability was determined to have no value.
The following table presents the activity during 2008 related to the debenture:
Principal balance of the debenture
Less reduction for:
Intrinsic value of beneficial conversion feature
Recorded at closing
Amounts converted into common stock
Amortization of beneficial conversion feature (interest expense) through December 31, 2008
Carrying value at December 31, 2008
Effective January 1, 2008, we adopted SFAS 157, Fair Value Measurements (SFAS 157). SFAS 157 clarifies the definition of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value as follows:
Level 1-Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date.
Level 2-Inputs are unadjusted 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, inputs other then quoted prices that are observable, and inputs derived from or corroborated by observable market data.
46
Level 3-Inputs are unobservable inputs which reflect the reporting entity’s own assumptions on what assumptions the market participants would use in pricing the asset or liability based on the best available information.
The adoption of SFAS No. 157 did not have a material impact on our fair value measurements.
The following tables present our assets and liabilities that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy.
Description
Liabilities
Convertible debenture embedded derivative related to timely filing (see note 10)
Convertible debenture embedded derivative related to interest rate adjustment
Total Liabilities
1
Due to low probability of late filing, value was determined to be de minimus as of December 31, 2008.
Event triggering interest rate adjustment has not occurred, therefore no value assigned as of December 31, 2008.
47
In January 2009, related to the convertible note payable described in Note 12, the holders converted $35,000 of convertible notes to 531,905 shares of common stock at conversion prices ranging from $0.06 to $0.09 per share. Additionally, in January 2009, the Company received $200,000 in cash proceeds from the holders on terms as more fully described in Note 11.
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The Company’s Chief Financial Officer and acting Chief Financial Officer has 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 the fiscal period ending December 31, 2008 covered by this Annual Report on Form 10-K. Based upon such evaluation, the Chief Executive Officer and acting Chief Financial Officer has concluded that, as of the end of such period, the Company’s disclosure controls and procedures were not effective as required under Rules 13a-15(e) and 15d-15(e) under the Exchange Act. This conclusion by the Company’s Chief Executive Officer and acting Chief Financial Officer does not relate to reporting periods after December 31, 2008.
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) of the Company. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.
The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.
Management, under the supervision of the Company’s Chief Executive Officer and acting Chief Financial Officer, conducted an evaluation of the effectiveness of internal control over financial reporting based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that the Company’s internal control over financial reporting was not effective as of December 31, 2008 under the criteria set forth in the Internal Control—Integrated Framework.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. Management has determined that material weaknesses exist due to the lack of an independent Audit Committee Chair, as well as a lack of segregation of duties, resulting from the Company’s limited resources.
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the SEC that permit us to provide only management’s report in this Annual Report on Form 10-K.
Changes in Internal Control Over Financial Reporting
No change in the Company’s internal control over financial reporting occurred during the quarter ended December 31, 2008, that materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
None
Part III
Set forth below is certain information concerning the directors and executive officers of the Company.
Biographies
Michael Rouse is the founder of the Company and currently serves as its Chairman and Chief Executive Officer. Mr. Rouse is Vice President of Cox-Rouse Construction & Development Corporation, a commercial real estate developer located in Deland, Florida. Mr. Rouse is a commercial building contractor and developer, and licensed commercial aircraft pilot. Mr. Rouse was President of M&D Aircraft Leasing and Skydive Palatka, a successful parachute center, from
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October 1995 to June 2002, until he sold Skydive Palatka. He received his schooling in Management Training at United States Steel Corporation in 1975; Computer Programming at Daytona Beach Community College in 1993; and Science, Art and Drafting at Valpraiso Industrial Arts School in 1973. He is a former Production Manager for United States Steel, and General Manager of Freefall Express, Inc., an airplane leasing company, from 1989 to 1990.
Phyllis J. Rouse serves as the Company’s Vice President, Secretary, Treasurer and as a Director. From 1997 to present, Mrs. Rouse is a public school administrator at Yulee Elementary School in Yulee, Florida. She has extensive administrative experience and training in accountability for all budgets, curriculum, student performance, personnel, facilities, discipline, while supervising over 70 personnel and 650 students on a daily basis. Mrs. Rouse is the sister-in-law of Michael Rouse.
John R. Dickinson, CPA serves as an independent member of the Company’s Audit Committee. Mr. Dickinson has spent over nineteen years in public accounting, including four years with the seventh largest CPA firm in the United States. During his career, he has gained extensive knowledge in individual and corporate taxation, financial reporting, and accounting information systems. His diverse background includes the performance of financial statement audits; litigation support services; mergers and acquisitions; business valuations; general business consulting; and tax compliance. After noticing a need for quality CPA firms in the Central Florida marketplace, Mr. Dickinson started a full service CPA firm in 2003. The firm has experienced significant growth since inception and is currently servicing a wide range of industries including construction, distribution, medical, insurance, individuals, litigation, manufacturing, technology, transportation, and non-profits. He is a Certified Public Accountant, and is a member of the Florida Institute of Certified Public Accountants. He is also very active in his community including the finance committee chairman of the DeLand First Presbyterian Church, treasurer of the Neighborhood Center, and sat on the board of directors for Hugh Ash Manor. In addition, he is a YMCA basketball coach, and member of the DeLand Quarterback Club.
Mr. Dickinson is a Cum Laud graduate of Geneva College with a Bachelor of Science degree in Business Administration and Accounting. Mr. Dickinson also attended Stetson University to obtain additional credit hours to meet Florida CPA licensing requirements.
AUDIT COMMITTEE
The Audit Committee consists of Michael Rouse, John R. Dickinson, CPA and Rebecca McDonald, Chief Accounting Officer. The Audit Committee selects the independent auditors; reviews the results and scope of the audit and other services provided by the Company’s independent auditors and reviews and evaluate the Company’s internal control functions. The board of directors has determined that John Dickinson is the audit committee “financial expert”; as such term is defined under federal securities law, and is independent. Mr. Dickinson is an expert by virtue of: (i) education and experience as a principal financial officer, principal accounting officer, controller, public accountant or auditor or experience in one or more positions that involve the performance of similar functions; (ii) experience actively supervising a principal financial officer, principal accounting officer, controller, public accountant, auditor or person performing similar functions; (iii) experience overseeing or assessing the performance of companies or public accountants with respect to the preparation, auditing or evaluation of financial statements; and (iv) other relevant experience.
CODE OF ETHICS
We have adopted a code of ethics meeting the requirements of Section 406 of the Sarbanes-Oxley Act of 2002. We believe our code of ethics is reasonably designed to deter wrong doing and promote honest and ethical conduct; provide full, fair, accurate, timely and understandable disclosure in public reports; comply with applicable laws; ensure prompt internal reporting of violations; and provide accountability for adherence to the provisions of the code of ethic.
The following table sets forth information concerning the aggregate compensation paid or to be paid by the Company to its executive officers.
SUMMARY COMPENSATION TABLE
Name and Principal Position
Michael Rouse,President, CEO, Chairman of the Board
2007
$
100,000
0
James A. Teters, Jr.President, COO and Director
52,000
27,987
79,9877
Phyllis J. RouseVice President, Secretary, Treasurer and Director
79,987
50
OUTSTANDING EQUITY AWARDS AT DECEMBER 31, 2008
Name
not applicable
51
DIRECTOR COMPENSATION
Directors receive no compensation for serving on the Board.
The following table summarizes compensation paid to all of our non-employee directors:
The following table sets forth certain information as of December 31, 2008, with respect to the beneficial ownership of our common stock by each beneficial owner of more than 5% of the outstanding shares of common stock of the Company, each director, each executive officer named in the “Summary Compensation Table” and all executive officers and directors of the Company as a group, and sets forth the number of shares of common stock owned by each such person and group. Unless otherwise indicated, the owners have sole voting and investment power with respect to their respective shares.
Name of Beneficial Owner
Michael Rouse
Alpha Engines Corporation (1)
Phyllis J. Rouse (2)
All directors and executive officers as a group (4 persons)
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Audit Fees
During 2008 and 2007, we were billed by our accountants, Pender Newkirk & Company, approximately $57,000 and $44,300 for audit and review fees associated with our 10-K, 10-KSB, 10-Q and 10-QSB filings.
Tax Fees
During 2008 and 2007, we were billed by our accountants, Pender Newkirk & Company, approximately $0 and $0 for tax work.
All Other Fees
During 2008 and 2007, we were billed by our accountants, Pender Newkirk & Company, approximately $0 and $0 for other work.
Board of Directors Pre-Approval Process, Policies and Procedures
Our principal auditors have performed their audit procedures in accordance with pre-approved policies and procedures established by our Board of Directors. Our principal auditors have informed our Board of Directors of the scope and nature of each service provided. With respect to the provisions of services other than audit, review, or attest services, our principal accountants brought such services to the attention of our Board of Directors prior to commencing such services.
Regulation
Number
Exhibit
3.1
3.2
3.3
31.1
32.1
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
/s/ Michael Rouse
/s/ Rebecca A. McDonald
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